It's crucial to avoid the trap of focusing on the same types of
investments for your portfolio. Investors tend to focus on large
caps, small caps or dividend-paying stocks exclusively, when they
should own a basket of all of them. A diversified portfolio still
brings the best combination of risk and reward, as you're not
beholden to a specific economic or financial trend. For example,
investors who own nothing buy high-yield stocks may
if interest rates start to rise and government-sponsored yields
become comparatively more appealing.
So even as I tend to mostly focus on large and stable companies, I
also keep an eye on small-cap stocks and low-priced stocks. These
kinds of stocks are either off the radar or out of favor, and often
appreciate smartly while few investors even notice.
Here are five stocks under $5 that hold appeal right now. Each
carries more risk than a large and stable blue chip, so it's wise
to make smaller investments in them. By doing so, you can add some
upside to an otherwise steady-as-she-goes portfolio.
1. Hecla Mining (NYSE:
This silver miner trades just above its
, thanks to a series of recent stumbles, including the late 2011
closure of its Lucky Friday mine. It will be several quarters
before this mine is back in operation, so analysts have had to
sharply curtail their forecasts for 2012 output and profits.
But Hecla also has a range of other mines ramping up, so the stage
is set for a much better 2013 and 2014. Per-share profits, for
example, are expected to rise from about $0.30 to $0.50 in 2013.
Equally important, the company's mines are quite valuable: Merrill
Lynch says they're worth a collective $5.80 a share in terms of
Net Asset Value
). That's roughly 50% above the current share price. And this
assumption is based on a long-term price assumption of $27 an ounce
for silver. The current
is around $30.
2. Wendy's (NYSE:
This past week marks the one-year anniversary for Emil Brolcik, the
of this fast-food chain. During the past year, the proven industry
veteran has taken a close look at operations and ultimately
strategy, which I wrote about here.
The market remains dubious, as
are exactly where they were a year ago. But as I cautioned back in
January, turnarounds can take several years to play out. On a
purely qualitative basis, Brolick's vision for Wendy's makes ample
sense. Focus on quality ingredients, and you can separate from the
fast-food pack. Whether Brolick can execute on his plan is still an
open question, but the
makes this stock a potentially strong gainer during the next few
3. Gafisa (NYSE:
I wrote about this Brazilian homebuilder roughly a month ago and it
still appears to
high risk and high-reward. Simply put, the Brazilian housing sector
is currently retrenching after a building boom that led to a
housing glut. The excesses are being worn off, and with the
expected to get a major boost from the World Cup and the Olympics
in coming years, the housing market should spin back to life in a
year or so. Meanwhile, a drop from $18 to $4 in the past 18 months
has pushed this out-of-favor stock into value territory. Shares now
trade not far above
of $3.31 a share. And this figure has been heavily marked down from
write-offs that likely undervalue Gafisa's
holdings when the Brazilian economy turns back up.
4. Celsion (Nasdaq:
This is the only biotech stock I'm focusing on right now. Celsion
has developed ThermoDox, which is a heat-activated drug delivery
technology currently in Phase III testing for liver cancer. As with
many biotechs, the company must keep reloading the
with more cash to stay afloat, which has heavily pressured shares.
The good news: Investors need not wait years and instead just a few
more quarters to analyze that Phase III data. If the news is good,
then Celsion is likely to pop up on the radar of many biotech
investors. In a best-case scenario, ThermoDox could be selling in
Europe and China in the first half of 2013, and in the United
States in the second half of the year. Management will provide a
progress report when first-quarter results are released in mid-May.
5. Cenveo (NYSE:
Buying on the way down. That's what insiders have been doing at
this printing company. The still-slow economy, coupled with a move
toward electronic communication has led to a pullback in demand for
printed envelopes, stationary, labels and direct mail materials.
Sales of $1.9 billion in 2011 remain below the $2.1 billion peak
seen back in 2008. But even with top-line challenges, Cenveo still
throws off ample
free cash flow
: $65 million in 2011 and a cumulative $350 million during the past
Yet shares remain under pressure because Cenveo carries more than
$1 billion in debt. As a result, the company generated $133 million
in 2011 but had to pay out $116 million of that in interest
payments. So here's the opportunity for investors: Pay close
attention to operating income and interest expense when
first-quarter results are released in a few weeks, (and perhaps
again in the June quarter). If operating income is starting to pull
away from interest expense, then Cenveo may have the makings of a
solid turnaround candidate.
Risks to Consider:
In a falling market, investors tend to especially shun
small-cap stocks, so these companies could fall even further out of
favor if the indexes pull back sharply.
Action to Take -->
These companies aren't simply cheap. They've stumbled badly (except
for Celsion, which had a too-weak balance sheet). But in each case,
a clear path to upside exists. Quarterly results will tell us if
they are getting back on the right path. If results are positive,
then you might want to take a modest amount of cash in your
portfolio and put it into one or more of these stocks.
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-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.
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