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When we talk about a low-priced stock, we usually mean one whose share price looks cheap in relation to the company's profits or some other fundamental measure. But some stocks are also cheap in another sense: You can buy their shares for a few bucks -- in some cases, for less than you'd pay for a gallon of gas.
A stock price in single digits isn't usually a sign of value. Stocks with microscopic prices oftenrepresent troubled companies that most investors have given up for dead. In other cases, the company is unproven and flying below everyone's radar. The trick is to look past the low price for the good stocks that have gone unnoticed.
Low-priced stocks are usually risky. Companies in this price range are often unprofitable or debt-ridden, or their business strategies are untested. They're suitable only for the small portion of your portfolio set aside for high-risk investments. We've identified seven stocks that trade for roughly $7 or less that we think won't be so low-priced down the road.
Fido's enablers
The economy may have gone to the dogs, but the dogs aren't complaining. Nor are the cats. Spending on pets in the U.S. is expected to hit $43.4 billion this year, up more than 5% from last year, according to the American Pet Products Manufacturers Association. That's almost what we'll spend on toys and candy combined.
How to cash in on this trend? One solution is to buy shares of Animal Health International (symbol AHII). The company supplies more than 40,000 products -- including pet food, drugs and equipment -- to more than 65,000 veterinarians, retailers and farmers.
However, shareholders of Animal Health, which went public in January 2007 at $11, haven't cashed in on the pet boom. The stock plunged from its July 2007 high of $15 to a bit less than $8 in early September, mainly because of problems in the livestock industry, which accounts for about 60% of Animal Health's sales. High grain prices have squeezed farmers' profit margins. They've responded by reducing herds and spending less on Animal Health's products.
But prospects are bullish for a stronger beef market and for the stock. Beef-cattle raisers account for about a third of Animal Health's sales, says Piper Jaffray analyst Mark Arnold. Grain prices are stabilizing, and activity in the futures market foreshadows higher cattle prices in the next six to 12 months, he says. This should spur farmers to raise more cows and buy more Animal Health products.
Meanwhile, the pet portion of Animal Health's business continues to track national trends. The Westlake, Tex., company posted a 14% increase in sales for the fiscal year that ended in June. Analysts see sales rising 6% in the June 2009 fiscal year.
Bullish on bears
Those cuddly stuffed animals created in Build-A-Bear Workshop stores are the stuff of nightmares for many Build-A-Bear shareholders. As recently as June 2007, the retailer's stock traded above $30, coasting on charming earnings gains and the regular opening of sprightly new stores. The founder, Maxine Clark, even calls herself Chief Executive Bear. Too cute.
But high costs and weak retail spending have beaten the stuffing out of the stock (BBW), which recently traded at less than $8. Earnings fell last year, and analysts see them falling by roughly half this year, to 57 cents a share.
The concept is simple. Kids stuff, fluff, dress, accessorize and name their own teddy bears and other stuffed animals at 388 stores worldwide. To keep customers coming in, Build-A-Bear tries to tap in to current fads. For example, this fall it launched a Hannah Montana bear, which the company describes as "sparkly white with purple trim that combines the cool factor and the cuddle factor."
Lawrence Creatura, manager of Touchstone Diversified Small Cap Value fund, understands why investors aren't cuddling up to the stock. In Build-A-Bear's second fiscal quarter, which ended June 28, U.S. same-store sales (sales at stores open at least 12 months) were down 21% from the same period in 2007, and the company lost $4.8 million, or 25 cents per share. "Investor sentiment is dark," says Creatura, whose fund owns the stock.
Creatura says the "build-a-bull" case goes like this: The company is debt-free, still profitable (especially overseas), and "the potential for expansion beyond Europe remains untapped." Can you say, Build-A-Panda?
True, the St. Louis company's domestic operations look dicey while the U.S. economy struggles. But expect a leaner, meaner Build-A-Bear to emerge by the time the recovery comes and to capitalize on, as Creatura puts it, one immutable fact: "Teddy bears and birthday parties won't go out of style."
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