10 Top Stocks Under $5 for 2012 Picked by Analysts
Robert Holmes
BOSTON (TheStreet) -- Sprint Nextel(S) and U.S. Airways(LCC) may be the best inexpensive stocks for 2012 -- if analysts are to be believed.
After a rollercoaster ride in equity markets this year, investors are more than willing to look ahead to 2012. Record volatility has forced investors out of riskier assets and into large-cap stocks with dividends -- or completely out of the market altogether. Some risk-averse investors have piled into U.S. Treasuries, an incredibly irrational move considering the 10-year Treasury yields less than the rate of inflation.
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While some investors will continue on a path of safety heading into 2012, others may find more opportunity (and risk) in stocks trading under $5, which typically don't receive attention from mutual funds due to their miniscule share prices. Many low-priced stocks have proven to be winners, including TeamStaff(TSTF), Majesco Entertainment(COOL) andAdolor(ADLR), all of which have more than tripled this year.
For potential winners of the coming year, analyst recommendations are one good source of opinions. Stocks trading under $5 typically have zero coverage from Wall Street -- never mind a "buy" rating -- leaving investors to do the homework for themselves. However, a select few boast of favorable coverage from analysts, which can have a strong effect on share-price movements.
Of course, using analysts' ratings alone isn't a wise investing strategy. As it turns out, the stocks with the most "buy" ratings headed into 2011 were mostly losing bets. Of the 10 stocks on last year's list, only two were winners. Achillion Pharmaceuticals(ACHN) and Ariad Pharmaceuticals(ARIA) are up 71% and 143%, respectively, so far in 2011.
To give you an idea of how badly the other eight stocks performed this year, a portfolio of all 10 stocks with equal weightings would have a return of minus 23% this year. By comparison, the Russell 2000 -- an index of small-cap stocks -- is down only 5% this year. The worst performer of the bunch was General Maritime(GMR), which filed for Chapter 11 bankruptcy last month.
Betting on small-cap penny stocks is a risk, for sure, but it's one plenty of investors might want to take. The following 10 U.S. stocks trade at less than $5 and have garnered the most "buy" ratings from Wall Street analysts. It remains to be seen if those votes of confidence will lead to high returns over the next 12 months.
10. Sirius XM(SIRI)
Company Profile: Sirius XM is a subscription satellite radio company, created in the 2007 merger between Sirius and XM Radio.
Share Price: $1.90 (Dec. 2)
2011 Stock Performance: 16%
Analyst Consensus: Sirius XM shares had an impressive run again this year, although investors can't be happy that the stock trades below $2 after rising as high as $2.44 earlier this year. That said, Sirius XM is only one of two stocks that made this list that also gained ground in 2011. Analysts are looking for more upside in 2012, with 9 of the 12 researchers following the stock saying that it is a "buy."
Bullish Case: Barrington Research analyst Jim Goss, who has an "outperform" rating on Sirius XM with a price target of $2.40, raises the idea that the company could initiate a share buyback in 2012 to reduce the massive number of shares outstanding.
"Sirius XM Radio continues its story of redefining its growth and profitability potential. Subscriber counts continue to rise, helped importantly by much improved auto sales trends," Goss wrote in a Nov. 28 research report. "Financial position continues to improve, positioning the company to seriously consider the return of capital to shareholders, potentially involving a share buyback as early as next summer."
Company Profile: Sprint Nextel is the third-largest wireless provider in the U.S. by subscriber count, behind rivals AT&T(T)and Verizon(VZ).
Share Price: $2.69 (Dec. 2)
2011 Stock Performance: -36%
Analyst Consensus: Sprint is the one carryover from 2011's list of analysts' most loved stocks under $5, even though the stock plunged 36% this year on a number of developments. The company committed $15 billion to bring the Apple iPhone to its network. However, investors were flummoxed by Sprint's cloudy 4G expansion plan and were downright angry with a funding gap of as much as $7 billion.
Still, nine analysts believe in Sprint's prospects, although that's only about a quarter of all analysts following the stock. The average price target of about $3.39 implies upside of 25%, so there still could be room for this stock to run over the next year.
Bullish Case: Wells Fargo senior analyst Jennifer Fritzsche, who has an "outperform" rating on Sprint, says it is important for the company to successfully get the funding deal done for Clearwire(CLWR) by raising debt.
"There is much liquidity in the marketplace now that has been on the sidelines," Fritzsche wrote in a Nov. 4 research note. "While we realize this market is as much as driven up by macro headlines as anything and much can change on a daily basis, we believe this bodes well for Sprint's ability to get the deal done."
8. Gastar Exploration(GST)
Company Profile: Gastar is an independent energy company, engaged in the exploration, development and production of natural gas and oil in the U.S. and Australia.
Share Price: $3.45 (Dec. 2)
2011 Stock Performance: -20%
Analyst Consensus: Natural gas stocks have been a speculative play for traders because of the potential for M&A activity. With the stock down 20% this year, Gastar wasn't one of the lucky buyout targets. Analysts, though, say there is plenty of opportunity for a big winner, with 9 out of 12 analysts following the stock rating it a "buy." An average price target of $5.19 would mean a whopping 50% rally in the stock if that came to fruition over the next 12 months.
Bullish Case: KeyBanc Capital Markets analyst David Deckelbaum reiterated a "buy" rating and $5.75 price target on Gastar in November, saying that the company's third-quarter production miss obscured the potential for 2012.
"The pipeline issues in the Marcellus are temporary and do not affect our longer term thesis on the stock, as we see significant production growth in the Marcellus and Bossier shale plays providing significant upside in 2012 and beyond," Deckelbaum wrote in a Nov. 6 research report.
Company Profile: Abraxas is engaged in the exploration and production of crude oil and natural gas along the Texas Gulf Coast, in the Permian Basin of western Texas and in Wyoming.
Share Price: $3.73 (Dec. 2)
2011 Stock Performance: -18%
Analyst Consensus: Abraxas is a far smaller oil exploration and production company ($344 million market cap) than counterparts like Exxon Mobil(XOM) ($383 billion market cap). However, Abraxas shares are down this year along with the company's production and, as a result, revenue. Still, analysts are behind the stock, with nine of 10 researchers following Abraxas recommending its stock as a "buy." The average price target of $5.50 implies upside of about 47%.
Bullish Case: Canaccord Genuity analyst Marcus Talbert reiterated his "buy" call and $5.50 price target on Abraxas last month following the company's third-quarter earnings report and outlook.
"We remain constructive on AXAS' transformation progress and growing exposure to an oil-weighted production base," Talbert wrote in the Nov. 14 research report. "The company's execution in each of its core plays continues to exceed our early expectations. In addition to the Bakken development program, we see material catalysts (Eagle Ford/Pekisko monetization) that should unlock embedded value in 2012."
6. MEMC Electronic Materials(WFR)
Company Profile: MEMC Electronic Materials manufactures and sells wafers for use in the solar industry.
Share Price: $4.28 (Dec. 2)
2011 Stock Performance: -62%
Analyst Consensus: Before 2011 began, MEMC Electronic Materials wasn't even close to penny-stock land, with shares trading in the low teens. But what a difference a few months makes. Shares have been on a steady slope downward along with most other solar-related stocks. Like other companies, MEMC is dealing with oversupply issues that have resulted in a weaker earnings outlook than analysts expected.
Still, MEMC remains a favorite of analysts in the under $5 world. Nine analysts have a "buy" rating on the stock, although that's only 35% of the total number of researchers following the stock. On the positive side, the average price target of $7.43 implies potential upside of 73% over the next 12 months.
Bullish Case: Deutsche Bank analyst Vishal Shah is a believer in MEMC despite the rapid drop in share price this year. In November, Shah reiterated a "buy" rating with a $10 price target after MEMC reported quarterly results.
"We acknowledge limited near term catalysts for outperformance but believe semis/solar weakness is already priced into shares," Shah wrote in a Nov. 3 research report. "Bottom line: Q3 results were not ideal, but the worst was likely in the shares. Management is taking the right actions and overall execution seems to be improving - the company generated positive cash flow/free cash flow even in a tough operating environment."
Company Profile: U.S. Airways Group is the holding company for U.S. Airways, one of the largest airline operators in the U.S.
Share Price: $4.90 (Dec. 2)
2011 Stock Performance: -51%
Analyst Consensus: Like MEMC, U.S. Airways shares traded above $10 to begin 2011. But like nearly every other airline stock this year, U.S. Airways shares have crash landed. While the bankruptcy of AMR Corp.(AMR) has been beneficial to investors in U.S. Airways and others, rising crude prices and shrinking profits have crushed airline stocks all year long.
Analysts are still bullish on the future of U.S. Airways with 9 analysts, or 60% of those following the stock, recommending that investors buy the stock. The average price target of $10.18 means that researchers expect the stock to more than double over the next 12 months.
Bullish Case: After U.S. Airways reported quarterly numbers in October, Deutsche Bank analyst Michael Linenberg reiterated a "buy" call on the stock with a price target of $12, noting the company's improved forecast and revenue strength.
"We believe that US Airways (and the industry) seems to have right sized its operation to a point where it can exert pricing power even in a slow growth economy characterized by high fuel prices," Linenberg wrote in the Oct. 28 research report.
4. Hercules Offshore(HERO)
Company Profile: Hercules Offshore is a provider of shallow-water drilling and marine services to the oil and natural gas exploration and production industry.
Share Price: $4.03 (Dec. 2)
2011 Stock Performance: 15.8%
Analyst Consensus: Like Sirius XM, Hercules Offshore shares had a nice run in 2011. The stock surged in February after the company announced that it would acquire nearly all of Seahawk Drilling's assets for $105 million in cash and stock. However, shares pared those gains in September after Hercules Offshore announced it had increased its stake in Discovery Offshore to more than $34 million.
For the most part, analysts like Hercules Offshore, with the stock garnering 10 "buy" ratings out of 24 researchers covering the stock. The average price target of $4.88 would mean an increase of 21% from current levels.
Bullish Case: Credit Suisse analyst Brad Handler is optimistic on Hercules Offshore as the Gulf of Mexico market heats up. He has a target price of $6.50, well above the average analyst price target.
"We believe continued day-rate and contracting momentum in the Gulf of Mexico should drive a limited number of reactivations by mid-2012, supporting positive share price performance on a relative basis provided macro concerns remain 'eased' on a go-forward basis," Handler wrote in an Oct. 28 research report.
Company Profile: Hersha Hospitality is a real-estate investment trust that own 73 hotels primarily located in the Northeastern U.S. states and on the West Coast.
Share Price: $4.46 (Dec. 2)
2011 Stock Performance: -32.4%
Analyst Consensus: Hersha Hospitality shares were little changed for the first half of 2011 until a sudden drop-off in August shortly before the company announced it would sell 18 hotels to Starwood Capital for $155 million in order to reduce its debt load.
Analysts remain fans of the stock despite the rough summer. Ten of the 14 analysts following Hersha Hospitality rate the stock a "buy." The average price target of $5.52 would mean potential upside of about 24% from current levels.
Bullish Case: Bank of America/Merrill Lynch analyst Shaun Kelley reiterated the bank's "buy" rating on Hersha in November after the company announced it would buy the Courtyard Miami Beach Oceanfront for $95 million.
"Today's deal is a prime example of HT's capital recycling, moving to higher growth urban markets even as its selling down low growth assets (portfolio sale to Starwood Capital)," Kelley wrote in a Nov. 9 research note. "HT's near term results could be choppy (1Q is seasonally weak in NYC), but we still like longer term prospects given its high margin profile, consistent cash flow and improving portfolio quality."
2. Power-One(PWER)
Company Profile: Power-One is the world's second-biggest provider of solar inverters. The company is also among the largest providers of power conversion and power management solutions in the world.
Share Price: $4.24 (Dec. 2)
2011 Stock Performance: -58.3%
Analyst Consensus: Power-One investors are licking their wounds this year as the stock has fallen from $12 in February to about $4. Power-One has suffered from continually guiding forecasts below analysts' estimates. The company most recently saw a drop in third-quarter profit and offered a weak outlook for the fourth quarter because of the global macroeconomic uncertainty that has dented renewable energy firms around the globe.
However, the company still pulls in 11 "buy" ratings from the 20 analysts following the company. The average price target of $6.29 implies upside potential of 48% over the next 12 months, although that would still fail to regain the 2011 high of $12.14.
Bullish Case: Cantor Fitzgerald analyst Dale Pfau in late October reiterated a "buy" rating on the stock, noting that Power-One continues to gain market share in a challenging industry.
"Based upon the challenging solar environment, investors should be heartened by solid profitability, continuing market share gains, and an outlook for improving margins," Pfau wrote in an Oct. 28 research note. "We believe that the shares are attractively valued at current levels, and we suggest that investors accumulate shares in anticipation of further market share gains."
Company Profile: Magnum Hunter Resources is an independent exploration and production company. The company is involved with exploratory leases, secondary enhanced oil recovery projects, exploratory drilling, and production of crude oil, natural gas liquids and natural gas in the onshore U.S.
Share Price: $4.82 (Dec. 2)
2011 Stock Performance: -33.2%
Analyst Consensus: Magnum Hunter Resources gets high marks from analysts because of the acreage it controls in the Marcellus Shale region, a hot spot for natural gas drilling. However, the stock was crushed in August, dropping from above $7 to below $5 in a matter of days, after Magnum Hunter agreed to pay $57 million to property in North Dakota. Not long after, the company said its second-quarter net loss widened from a year earlier, putting further pressure on the stock.
Analysts believe in the company's growth, with 15 of the 17 researchers following the stock recommending that investors buy up shares. The average price target of $7.30 represents upside of 51% from current levels.
Bullish Case: Canaccord Genuity analyst Marcus Talbert is among the bullish researchers following Magnum Hunter. Last month, Talbert upped his price target on the stock to $8 as he reiterated his "buy" rating on the stock, saying that results for the company continue to improve.
"At present, we believe the market does not fully appreciate MHR's rich opportunity set or relative growth potential," Talbert wrote in a Nov. 11 research report. "In addition to progressively better well results, we believe there are material catalysts (Utica developments, asset divestures and/or midstream monetization) that will drive value creation into 2012."
>>To see these stocks in action, visit the 10 Top Stocks Under $5 for 2012 portfolio on Stockpickr.
I like Linenberg as an analyst- I usually follow his advice becaue he has a high average return and a long history rating airline stocks
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