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3 Stocks Under $10 with Massive Upside Potential - Analyst Blog

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Volatility continues to climb with earnings season gradually gaining momentum. With the market still hitting new highs every other day, it can be tricky to uncover value stocks. However, there is a side of Wall Street research beyond large-cap multinationals - the world of small-cap stocks.

Look Where No One Else Is Looking

Yes, it is true that such stocks have a deeper risk profile than established companies. On the other hand, for many individual investors, there's something fascinating about cheap stocks - perhaps because they have immense potential to grow, especially from a P/E multiple perspective.

Small Caps: Buffer vs. the Soaring U.S. Dollar

Unprecedented oil price volatility and sustained strength in the dollar are distorting earnings for most large-cap companies. Weakened demand apart, companies' overseas revenue streams will be greatly impacted by the decline in foreign currencies against the dollar.

In fact, the U.S. dollar is headed for even more strength, given the divergence in the global economy. In simple terms, China and Europe are stuck in the economic doldrums, necessitating stimulative monetary policy measures, while the U.S. is preparing to tighten its monetary policy - further grounds for strength in the U.S. dollar.

The backdrop of such headwinds highlights small-caps as even more lucrative propositions. Investing in such stocks offers investors a cushion against the damaging effects of a high U.S. dollar on corporate earnings. Small-caps generate a much smaller fraction of their revenues from abroad comparatively, thus lowering exposure to geopolitical tensions as well.

Foreign sales make up over 45% of aggregate revenues for companies in the S&P 500, whereas it accounts for less than 20% for Russell 2000 companies. (Russell 2000 represents the smallest 2000 listed companies in the U.S.)

Riding on U.S. Growth

Despite hiccups of disappointing data concerning durable goods, manufacturing activity and job growth, the March consensus for U.S. growth still stands at 3.1% for 2015 and 2.9% for 2016. That may not stand out as exceptional, but the U.S. economy has weathered a number of storms over the past six years - from the European debt crisis to last year's frigid winters. It nevertheless manages to keep moving ahead.

Given the current earnings expectations, the S&P 500 has slight, if not negative, potential for growth this year. (See our Earnings Trends article for more details.)

In contrast, the Russell 2000 has considerable room for expansion. Year to date, the Russell 2000 has climbed over 5%, significantly outpacing the S&P 500's appreciation of 1.8%.

Small-caps are the perfect way to ride further domestic growth, while at the same time limiting exposure to international sales, energy sector volatility and dollar woes.

3 Small Cap Stocks with Large Prospects

To weed out stocks that are trading under $10 and have excellent prospects, we screened the following 3 stocks using our new style score system .

The Zacks Style Score, created to complement the Zacks Rank, takes into account all relevant metrics to give us an actionable picture that helps identify stocks with stellar growth prospects, attractive valuations and great momentum. Back-tested results show that stocks with Style Scores of 'A' or 'B', when combined with Zacks Rank #1 (Strong Buy) or #2 (Buy) handily outperform other stocks.

The Zacks Style Score (comprising of the Value, Growth and Momentum scores) collectively considers nearly 20 different measures correlated to future stock returns. Thus, it is one of the most comprehensive indicators available to investors, especially when combined with the Zacks Rank.

The stocks we zeroed in on have a solid Zacks Rank as well.

LeMaitre Vascular, Inc. LMAT

LeMaitre Vascular is a leading global provider of disposable and implantable devices for the treatment of peripheral vascular disease. The company, which belongs to the Medical Products industry, has an impressive product portfolio that includes Xenosure, Omniflow and HYDRO, which is expected to drive solid growth in 2015.

The company expects year-over-year revenue growth of almost 6% for the first quarter of 2015, while 2015 sales are projected to grow 5% over the prior year. The excellent growth prospects of this Zacks Rank #1 stock are underlined by its brilliant Growth Style Score of A. Also, the company's stock price has been witnessing impressive momentum lately.

The firm has been witnessing solid earnings estimate revision activity of late, suggesting that analysts are gaining more confidence on its prospects in both the short and long term. These revisions have helped boost the current year Zacks Consensus Estimate by 8% to 27 cents, over the last 60 days.

Current Price: $8.40

Growth Style Score: A

Value Style Score: B

Momentum Style Score: B

Atlas Resource Partners, L.P.ARP

A player in the Oil Exploration & Production space, Atlas operates as an independent developer and producer of natural gas, crude oil, and natural gas liquids in the U.S. Atlas has been facing tough times as a result of the catastrophic fall in oil prices . However, Atlas has impressive growth prospects in the future, and any bounce back in oil and natural gas prices would represent a catalyst for this Zacks Rank #2 company.

Oil prices have somewhat stabilized in recent times, and many now believe that evolving aggregate supply and demand dynamics will result in a meaningful recovery in pricing. When this takes shape, ARP is set to resume its sharp upward growth trajectory. Until then, the shares are at a bargain price for this company with a Growth Style Score of A.

The company has been witnessing solid earnings estimate revision activity lately, suggesting that analysts are gaining more confidence on its prospects in both the short and long term. These revisions have helped boost the current year Zacks Consensus Estimate by 25.3% to a loss of 62 cents, over the past month.

Current Price: $7.76

Growth Style Score: A

Value Style Score: B

Momentum Style Score: B

Merge Healthcare Inc.MRGE

Merge Healthcare develops medical imaging and clinical software applications and developmental tools that are on the forefront of medicine. The company recently launched a new business unit - iConnect Network Services, which will help it provide better interoperability services to healthcare enterprises.

The company, belonging to the Medical Information Systems industry, is poised to benefit from expansion in the healthcare IT industry over the next few years. Growth in domestic healthcare spending will likely be the primary growth driver for this Zacks Rank #2 company that holds a Growth Style Score of A. Also, the company's stock price has been witnessing striking momentum of late.

The company has been witnessing solid earnings estimate revision activity lately, suggesting that analysts are gaining more confidence on its prospects in both the short and long term. These revisions have helped boost the current year Zacks Consensus Estimate by 20% to 18 cents, over the last 60 days.

Current Price: $5.26

Growth Style Score: A

Value Style Score: B

Momentum Style Score: B

Aim Small This Season

Generally, companies trade at low share prices for a reason: they are not great investments. However, when all is said and done, a stock's price is not nearly as indicative of its value as its earnings growth, price-to-earnings ratio or cash flow metrics.

So look beyond the stocks in the limelight this earnings season, and invest in these hidden gems at throwaway prices by employing the Zacks' style score system. They just might turn out to be the next big story with exponential return prospects.

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MERGE HEALTHCAR (MRGE): Free Stock Analysis Report

ATLAS RES PTNRS (ARP): Free Stock Analysis Report

LEMAITRE VASCLR (LMAT): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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