It's no secret that small-cap and micro-cap stocks really take
it on the chin when investors grow skittish. A 5% or 10% drop in
can lead to even deeper hits for these riskier stocks. The converse
is also true: When the market is in rebound mode, these oversold
stocks can post some of the most impressive rallies.
At this point, investors in a buying mood are faced with two
choices: They can either focus on lower-risk blue chips that appear
inexpensively valued and possess respectable upside. Or they can
focus on riskier, beaten-down stocks that could rise much more
sharply in an improving
I've spent a considerable amount of time the last few months
focusing on blue-chip bargains. Here's a look at the other end of
the spectrum -- five stocks under $5 that could rise sharply in the
next few years, granted the global economy dodges a bullet with the
Recent price: $2.80
The dry shipping industry, which carries dry-bulk goods on massive
container ships, has been beset by weak demand and too much
capacity. As a result, lease rates for these ships plunged, leading
many industry players scramble for survival.
DryShips, which traded above $100 in 2008, is now worth less than
$3 a share. Yet just-released quarterly results imply that a bottom
has been reached. Better-than-expected lease rates led to $318
million in revenue, ahead of the $296 million consensus forecast.
Better still, the company topped the consensus
forecast for the first time in four quarters, earning two cents
more than the $0.14 prediction. Profits would have been a lot more
robust if not for some bad bets on
swaps. This stock will never revisit its past heights, simply
because its share count has risen nearly 1,000% in the past four
years, but a return to $5 or even $7 isn't out of the question now
that industry dynamics are reversing.
2. Leapfrog Enterprises (NYSE:
Recent price: $4.81
Back in January,
this maker of education-oriented toys was poised for a good
In subsequent months, the company failed to deliver on the promise
I foresaw, so its share price moved in the opposite direction I had
anticipated. Yet just-released quarterly results were nothing short
of a blow out, and a fresh stock surge has moved it up more than
10% from where I originally recommended it. Further upside looks
That's because Leapfrog's LeapPad, a sort of iPad for toddlers, is
finally gaining serious traction (though device-specific sales
weren't divulged). This fueled a 9% year-over-year gain in third
quarter sales to $151 million, and
earnings per share (
of $0.35 were nearly 30% ahead of forecasts. Yet it's the
all-important holiday season that could lead to a stock breakout.
As analysts at Needham note, the $100 LeapPad's "camera and
internal memory give it a strong advantage over competitors'
products, as does its strong library of apps and the pedigree of
the Leap Frog brand." They see
trading up to $6.
3. Casual Male (Nasdaq:
Recent price: $3.96
This menswear retailer, catering to the "big and tall" crowd, is a
perennial member of my top low-priced stocks list. Management has
done a great job of cutting costs and boosting margins, leading to
a nice profit rebound. This comes at a time when consumer demand
remains lousy, so any eventual rebound on consumer spending could
really ignite this
The numbers tell the story. Sales fell from $464 million in fiscal
(January) 2008 to $394 million in fiscal 2011. Yet
rose from $0.09 to $0.32 during that time, thanks to tight cost
controls. Results released in August portend even better days
ahead. Sales rose 4% in the second quarter to $101 million compared
with the same period in 2010, fueling a 17% jump in
. EPS of $0.14 was the best quarterly showing in more than three
years. Look for third-quarter results on Nov. 17 for signs that
story has real legs. I see shares trading up to $6.
4. Biolase Technology (Nasdaq:
Recent price: $3.03
I first profiled
this dental technology company in January, when shares
traded at about $1.50. The stock quickly moved up to a
of about $6.85 soon thereafter. A 50% pullback from that peak leads
me to again remind investors of the compelling value in this stock.
Under the tutelage of fresh management that came aboard in 2009,
quarterly results keep getting stronger. Sales are expected to more
than double this year to $54 million in comparison with last year,
and rise another 30%-40% in 2012 as sales channels are tweaked.
This stock is no longer simply a story about dentistry. Look for
Biolase to release new laser-based devices in the fields of
ophthalmology, orthopedics and aesthetics in 2012. This means
profit growth will be erratic during the next two years as Biolase
invests in these new vertical niches. This also means that
(projected) $75 million revenue base in 2012 could become a $150
million revenue base in a few years. I look for this stock to
revisit the 52-week high of $6.85 during the next 12 months.
5. American Superconductor (Nasdaq:
Recent price: $4.06
This maker of wind turbines deserves a mention, albeit short (I
profiled this company in more detail
). The abrupt end of a large and profitable relationship with
Chinese wind-power provider Sinovel has led to a sharp drop in the
company's results. But just-released quarterly results show a 30%
sequential jump in bookings as the company lands new customers. A
lawsuit that seeks $1 billion in damages from Sinovel could be a
game changer for the company, which is valued at just $230 million.
I dont' have a precise
yet because there are too many variables right now -- where the
stock goes depends on the outcome of the lawsuit with Sinovel,
growth and the move back to profitability. But it's definitely
worth monitoring it to see if business rebounds.
Risks to Consider:
Small-cap stocks only rebound when investors grow confident
that the bottom of an economic cycle is only a quarter or two away.
Right now, it's too soon to tell what the U.S. economy will look
like in 2012.
Action to Take -->
These five stocks represent a cross-section of industries --
transportation health care, clean energy, education and retail. As
such, they may be best bought as a basket of stocks in order to
remove company-specific risk and merely play the "economic cycle"
angle. One large gainer among them can help energize the whole
basket, since some of these stocks can rise more than 50%.
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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