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Sometimes stocks are like the sweaters you find at red-tag sales. They may be out of fashion, but they'll keep you warm this winter (and may even come back into style next year).
With that in mind, we went shopping in the stock-market equivalent of the final-markdown bin: companies with shares trading in single digits. Companies at these price points are often reclamation projects -- they've suffered from horrible missteps and are trading at a fraction of their former value. Relatively few analysts cover low-priced stocks, and institutional investors usually avoid them.
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But although comeback stories are relatively rare, they happen often enough to make it worthwhile to hunt in the bargain bin every now and then. For example, you could have bought fiber-optics maker Corning for a little over a buck in 2002. Today it's a $23 stock. Akamai Technologies, an Internet-services firm, soared from $1 in 2003 to $45 today.
What are the Cornings and Akamais of tomorrow? We found seven companies trading for less than $7 that appear to have turned things around. But keep in mind that these are still risky investments. The companies have neither size nor scale, and most don't pay dividends. But their prospects are improving, and at this point, most investors have not yet caught on.
Cells for rural America
The guy in the Verizon Wireless commercials who keeps asking, "Can you hear me now?" may leave the impression that big wireless-service providers are extending their networks to every nook and cranny of the nation. In fact, they hardly bother with rural areas, leaving it to companies you've probably never heard of. Dobson Communications, for example, is the largest rural cell-phone company in the U.S. It serves 1.6 million subscribers in 16 states, primarily under the Cellular One brand.
Sparsely populated areas may be harder to serve, but they offer better growth potential. The big wireless firms have already reached two-thirds of their potential customers, but penetration rates are lower in rural America.
Founded in 1936 as a landline-phone company, Dobson entered the wireless business in 1990. It was slow to upgrade its network to a standard known as GSM and lost customers. In 2005, the Dobson family, which still controls 57% of the voting stock, brought in former Nextel official Steven Dussek as chief executive. With the transition to GSM nearly complete, sign-ups of new customers are growing after declining for years, and data services, such as e-mail and text messaging, offer a potentially lucrative avenue of growth.
Although not profitable, the Oklahoma City firm has been using the cash it generates to pay down debt. Cash flow (net income plus noncash charges) has risen steadily and is expected to reach $440 million this year. Analysts expect a 10-cent-a-share loss this year, down from 90 cents last year. A return to profitability, which analysts expect in 2007, could be the spark that sends shares higher.
From little Akorns...
In the world of pharmaceuticals, Akorn Inc. gives new meaning to the word obscure. Annual sales of Akorn's generic drugs and other medical supplies total less than $70 million, and the market values its shares at just $284 million. But the stock could be a big winner if Akorn can generate annual revenue gains of 50%, as it says it can, on the strength of 18 drug applications on file with the government and more than 100 other product ideas.
Of course, most of those ideas and applications will never result in revenue-generating products. But Akorn is hardly a start-up. The company, which was founded in 1971 and is based in Buffalo Grove, Ill., makes ophthalmic drugs and "injectables," such as anesthetics and antidotes. It also manufactures drugs for other pharmaceutical companies. In the first quarter of 2006, Akorn won a $21-million contract to supply radiation antidotes to the U.S. Department of Health and Human Services. More recently, the company has formed an alliance with an Indian drug manufacturer to research generic biotech-based drugs.
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