When a stock costs less than dinner at a fast-food joint, there’s almost always a reason. The company may be losing money, experimenting with unproven technology or have its future riding on the outcome of a hard-to-predict event. Or it may just be tiny. All that said, dabbling in stocks with single-digit prices can also be like putting a few bucks on red or black at a roulette wheel—you’ve got a roughly 50-50 chance that a small investment could deliver a big reward.
Share prices are as of November 17, 2014; revenues are for the last 12 months.
- Headquarters: TorontoShare price: $6.63Market capitalization: $78 millionAnnual revenues: $0
- Aptose Biosciences (APTO), which has yet to ring up a single sale, is one such company worth considering because it has a drug that appears to cause apoptosis—cell suicide. Unlike the result of necrosis—the killing of living cells—cell suicide causes no damage to surrounding cells and organs. The apoptosis process even causes the dying cell to send out signals for the body to clean up the resulting mess.
Development of innovative treatments has given life to dozens of little biotechnology companies that aim to attack various types of cancer. They do so by either stimulating patients’ immune systems; blocking the pathways that allow the disease to spread; or finding unique ways to tag cancer cells so treatments can zero in on the errant cells, without causing great damage to the rest of the body.
Aptose’s drug is still in the early stages of clinical testing, but Canaccord Genuity analyst John Newman thinks it has a good chance of being effective in treating acute myeloid leukemia. Positive results even in early-stage testing could propel the stock upward, he says. If approved, Aptose’s product could eventually generate annual sales of $300 million in the U.S., he adds. He thinks the stock will reach $13 within a year and could go far if the Food and Drug Administration approves Aptose’s drug.
- Headquarters: Victoria, British ColumbiaShare price: $3.50Market capitalization: $110 millionAnnual revenues: $920,000
The body’s immune system typically protects you from disease by finding, attacking and expelling foreign elements. But the process that works wonders for someone with the flu is a killer when you’ve received a kidney transplant or have an overactive immune system that keeps itself busy by attacking healthy tissue. A small biotech company called Aurinia Pharmaceuticals (AUPH) has developed an immune-system suppressant, called Voclosporin, that has been proven effective in keeping the immune system from rejecting a transplanted kidney, says John Newman, a biotechnology analyst at Canaccord. The company is now testing the drug for its ability to treat lupus nephritis, a disorder characterized by a hyperactive immune system that ultimately attacks the patient’s healthy kidneys.
The FDA has approved no new treatment for lupus nephritis in 50 years. But because Voclosporin has proved safe in treating other ailments, Newman is confident that the drug will sail through its next phase of testing and ultimately ring up $630 million in annual sales. Newman thinks the stock will start to move even before the drug gets final approval and that the share price could triple over the next few years.
- Headquarters: ChicagoShare price: $7.57Market capitalization: $5.0 billionAnnual revenues: $3.0 billion
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Owning shares of Groupon (GRPN) since the daily deal provider went public in November 2011 has been anything but a good deal. The stock has sunk 73% from the initial offering price. But Sterne Agee analyst Arvind Bhatia thinks that’s about to change as Groupon shifts from “push” to “pull” sales by training consumers to come to its Web site to look for deals. About 10% of Groupon’s sales come from consumers who have actively searched for deals and landed at the Web site. Those customers typically spend 50% more than those who were pulled in by an e-mail, Bhatia says.
Sure, Groupon has plenty of competition, with the likes of Amazon.com (AMZN), LivingSocial and others peddling discounted deals on a wide array of goods and services. But Bhatia thinks Groupon’s ability to pull 150 million unique visitors to its Web site each month differentiates the company from the pack and makes Groupon a compelling way for small businesses to market their wares. Though the company is still posting net losses, operating earnings turned positive in the second quarter of 2014, and Groupon is expected to report operating profits of five cents per share for the year. Operating earnings are expected to jump to 15 cents per share in 2015, an astounding 200% rise. But, that, of course is off a low base. Still, the company’s potential is great enough that Bhatia predicts that the stock will sell for $12 within a year.
Kratos Defense & Security Solutions
- Headquarters: San DiegoShare price: $5.14Market capitalization: $297 millionAnnual revenues: $882 million
You may never have heard of Kratos Defense and Security Solutions (KTOS), a midsize defense contractor that makes electronic components used in drones, missiles, fighter jets and radar systems. What makes the business especially attractive is that Kratos works on “long-tail” jobs that can last decades, says Michael Crawford, an analyst with the Los Angeles investment banking firm of B. Riley & Co. As a result, even if future defense spending falls or grows at only a tepid pace, Kratos’s revenues are unlikely to drop precipitously. Another plus is that Kratos’s products are on the small and comparatively affordable side.
Kratos is in the process of refinancing and paying down the debt it took on when it bought three other defense contractors over the course of just a few years. Cleaning up the debt is likely to provide a big boost to earnings, which dropped sharply in 2014, and make Kratos an attractive acquisition target for bigger military contractors. But Crawford thinks the stock is a buy regardless of whether Kratos becomes a takeover target. He sees the shares reaching $9.50 within a year.
- Headquarters: Jacksonville, Fla.Share price: $1.11Market capitalization: $107 millionAnnual revenues: $0
In October 2013, a tiny semiconductor company called ParkerVision (PRKR) appeared to deliver a body blow to Qualcomm (QCOM), the giant chip maker whose technology is used in most of the world’s mobile phones. ParkerVision filed a lawsuit claiming that Qualcomm had stolen its patented technology for use in making the tiny chips that allow mobile phones to pull in data from nearby cell towers. A jury awarded ParkerVision, which doesn’t make anything but hopes to enforce its patents, a $173 million windfall. Several months later, a district court judge overturned the ruling, saying the jury didn’t have enough evidence to come to its conclusion. Now ParkerVision’s fate is riding on the appeal, as well as several other lawsuits against Samsung and other phone makers alleging similar infringements.
Getting those suits to pay off may sound like a long shot. But Ladenburg Thalmann analyst Jon Hickman believes that ParkerVision’s claim is strong and that the company should prevail on appeal. He thinks ParkerVision will also likely strike licensing deals with several other companies that have allegedly been using the company’s technology.
If he’s right, ParkerVision could leap from a company that generates no revenues to one that reports hundreds of millions in licensing fees annually. To be sure, basing an investment on the outcome of litigation is a gamble. But Hickman is confident enough in his analysis to place a one-year target price of $5 on ParkerVision’s stock, which would be a huge leap from its current value. However, if the lawsuits and licensing agreements don’t pan out, Hickman says, ParkerVision’s future could be in jeopardy.
- Headquarters: Camp Hill, Pa.Share price: $5.46Market capitalization: $5.3 billionAnnual revenues: $25.9 billion
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Launched as a mom-and-pop drugstore in the 1960s, Rite Aid (RAD) has grown into the nation’s third-largest pharmacy chain. But the company has been troubled since 2000, when an accounting scandal resulted in the imprisonment of several Rite Aid executives. New managers took over and expanded the company’s reach through a series of major acquisitions, but the buying spree left Rite Aid heavily in debt.
After flirting with extinction during the Great Recession, Rite Aid began to jettison poorly performing stores, remodel surviving locations and pay down debt. Analyst Ross Muken, of Evercore ISI, a New York City investment banking firm, says this restructuring is the basis of a comeback story that’s just getting started. Remodeled stores are attracting more customers. Also boosting results is an increased emphasis on wooing seniors with generic drugs and discount plans. Thanks to these developments, analysts expect Rite Aid’s earnings to soar 31%, to 38 cents per share, in the fiscal year that ends in February 2016. That’s on top of a 26% gain in the current year. Muken thinks the stock will be worth $6 within a year, but shareholders will benefit the most by taking a long-term approach to riding Rite Aid’s recovery.
Sirius XM Holdings
- Headquarters: New York CityShare price: $3.52Market capitalization: $19.4 billionAnnual revenues: $4.1 billion
The only thing tiny about Sirius XM Holdings (SIRI), the satellite radio company, is its stock price. In early 2000, as the dot-com craze was about to end, Sirius shares soared to $61. But the stock has been trading in single-digit territory for the past dozen years.
Sirius’s revenues have grown at a blistering 51% annualized rate over the past 10 years. And the company, which has been around since 1990, finally turned profitable in 2010. The stock, though, has been meandering since Liberty Media, which owns 53% of Sirius, early this year scuttled its plan to buy the rest of the company’s outstanding shares.
The key to future growth is new-car sales, says analyst James Goss, of Barrington Research, a Chicago-based investment bank. Roughly 70% of the cars sold in the U.S. now have Sirius technology built in, and buyers of new vehicles get a free trial to sample Sirius’s commercial-free radio content. Four in 10 drivers agree to subscribe once the trial is over, Goss says. That gives the company a steady, annuity-like stream of income.
To be sure, the rapid revenue growth Sirius has enjoyed is unlikely to continue as the company gets bigger. But between share buybacks and continued subscriber growth, analysts expect the company’s earnings to jump 50% in 2015, to 12 cents per share. The Value Line Investment Survey says Sirius shares have “wide” capital appreciation potential over the next few years, making them appealing to “speculative investors.”
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