Investing in low-priced stocks is a lot like shopping at a discount-clothing store. You have to sift through piles of polyester before you find the cashmere. But if you find the right sweater -- er, stock -- the rewards can be substantial.
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Look at a list of any day's top performers and you'll see that low-priced stocks almost always dominate. On January 9, for example, the 11 biggest winners had all finished the previous trading session in the single digits. The day's star, a biotech called Inhibitex (symbol INHX), rocketed 140% on a takeover bid.
Of course, the lists of the biggest losers are also often filled with low-priced stocks. These stocks are risky because the underlying companies are either small or troubled. Still, the hunt for the next Inhibitex tantalizes. In that spirit, we've identified six stocks selling for $10 or less (prices listed are for the Feb. 2, 2012 close) that have the potential to shine over the next few years. Just remember: Because they're high-risk, invest only money that you can afford to lose.
Alcoa (symbol AA) $10.42
The Pittsburgh-based aluminum giant is one of several major companies that have seen their stocks fall into single digits since the Great Recession. Not only is Alcoa big -- annual sales total $25 billion -- it is also a member of the Dow Jones industrials. Demand for aluminum, which is used in cars, aerospace and other industries, plunged during the recession. Although demand has since recovered, prices have remained low, thanks in part to Europe's woes and the economic uncertainty they have produced. Alcoa is responding by shuttering plants. It is also investing to meet rising demand from automakers, which increasingly rely on aluminum to meet government fuel-efficiency standards. The stock, trading at just two-thirds of book value (assets minus liabilities), looks cheap. S&P Capital IQ analyst Leo Larkin sees Alcoa at $13 in a year.
EarthLink (symbol ELNK) $7.66
EarthLink? Is that old dot-com still around? Indeed it is, and it's in the midst of reinventing itself from a consumer-oriented seller of Internet access to a provider of services for businesses, including virtual private networks and Web hosting, as well as basic phone and data offerings. To facilitate the transition, the Atlanta company has been buying up other communications firms. Rolla Huff, who became CEO in 2007 and has been the force behind the retooling, has also streamlined EarthLink's operations, slashing the workforce by 70% and exiting the Wi-Fi business. All of this upheaval led to a spike in earnings in 2008 and 2009, followed by a sharp drop in 2010 and a smaller decline last year. But the company is now positioned to see better results in the future. While you wait for other investors to catch on to EarthLink's transformation, you can bank on the stock's 3.0% dividend yield.
Kodiak Oil & Gas (symbol KOG) $8.71
Investors are going gaga over shale -- with good reason. Huge new discoveries and improvements in technology for extracting oil and natural gas from rock formations are putting the U.S. back on the road to energy independence. Denver-based Kodiak has a strong foothold in the Bakken oil-shale formation, a 200,000-square-mile swath of land in North Dakota, Montana and the Canadian province of Saskatchewan that contains the largest known reserve of light sweet crude oil in North America. Kodiak produced the equivalent of 17,000 barrels of oil per day last year, analysts estimate, and they project that production will hit 30,000 barrels per day by the end of 2012. Analysts forecast that sales will leap 360% this year, to $637 million, with earnings nearly quadrupling.
Points International (symbol PCOM) $8.56
Just about every major consumer business tries to lure customers with some sort of rewards program. One company that's cashing in on the points craze is Points International, which helps administer loyalty programs and counts among its clients airlines, Amtrak, Best Buy and Starbucks. The Toronto company also operates Points.com, the only Web site at which consumers can register their rewards programs, redeem and buy points, and trade points with other people. The number of repeat visits to the site increased 60% in the third quarter of 2011. Points' profits are growing briskly; analysts estimate that earnings will more than double in 2012. Points, which went public in February 2011 at $10 per share, is the smallest company on our list.
Velti (symbol VELT) $9.02
When Bose, the consumer-electronics company, wanted to promote a new headphone model, it turned to Velti, which placed ads on a smart-phone song-recognition app called Shazam. Users who clicked on the ad were taken to a mobile Web site. On the ad's first day, 70% of users who visited the site clicked the "buy now" button. Such is the appeal of Velti, an Irish company that also manages mobile ad campaigns for such companies as Intel and Johnson & Johnson. Velti, which went public in January 2011 at $15 per share, coasted to nearly $20 before crashing to its current price over concerns about the company's exposure to weak European economies and a disappointing earnings report. But the mobile-ad market is exploding: Sales were estimated at $13 billion in 2011 and are expected to hit $29 billion by 2014. Velti is well positioned to benefit from that growth. Analysts see earnings soaring 89% in 2012.
Xerox (symbol XRX) $7.79
Xerox, a name synonymous with innovation, is no longer just about Xeroxing. With its acquisition of Affiliated Computer Services in 2010, the Norwalk, Conn., firm now runs corporate technology departments and manages company benefits in addition to selling increasingly sophisticated copiers. Between the sales Xerox generates from servicing and providing supplies for those machines and the multiyear contracts that ACS customers typically sign, about 80% of annual sales (an estimated $22.8 billion in 2011) come in the form of what Xerox calls "annuity revenues." Because of tepid economic growth, analysts see earnings increasing only modestly in 2012, by 8%. But they forecast annual profit growth of 21% over the next three to five years. Xerox is the largest company on our list and, with a price-earnings ratio of 7, also the cheapest.