Sadly, $5 won't even buy a hot dog at the World Series these days.
In the stock market, though, it's a different story. A fiver (or less) can get you a neglected, come-from-behind stock that will add sweet gains to your portfolio.
Because of their low price tags, sub-$5 stocks are regularly ignored by Wall Street analysts and are off-limits to many mutual fund managers. This means great companies can go overlooked -- then catch the market's attention with a great performance and roar ahead.
Consider this recent history: On March 1, 750 stocks in the Russell 3000 Index -- the 3,000 largest public companies -- were trading for less than $5, according to Thomson Reuters. By Oct. 23, the group numbered just 320, because so many had done so well.
How well? About 60% had doubled. Only 35 of them, or 4.6%, had lost any value. The two best performers were Diedrich Coffee (DDRX, news, msgs) and Dollar Thrifty Automotive (DTG, news, msgs), up 74 times and 34 times, respectively.
Keep in mind, though, that we've seen a rare period in the market: a downturn that pulled many solid stocks below $5 quickly, then a huge rally that shot many of them right back up. And remember that, at any time, you need to treat this corner of the market with care.
Don't assume that a low-priced stock is a bargain. You have to weigh the price against earnings, sales or book value to make sure. And unless you have a real skill for analyzing companies, steer clear of bulletin board or pink sheet stocks, as many are outright scams.
To find this list of five great stocks still priced below $5, I turned to my usual bench of experts. First I looked at what insiders have been buying and selling, because with these neglected names, this signal can be powerful.
Next I consulted money managers with great records, including the hedge funds Strata Capital Management and Signia Capital Management, and Validea, which designs stock-picking systems to mimic investing greats.
1. Citigroup
Are you sick of hearing about big government bailouts to banks and companies that might never pay taxpayers back? Try to recover some of that money on your own. Buy shares of Citigroup (C, news, msgs).Sure, the bank is still a mess. But it's a government-guaranteed mess. The stock is not going to disappear, even though at $4.10 a share it's trading as if it might. Over time, as conditions improve, the shares will go up -- say, to $10 -- as the bank stabilizes.
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Citigroup has a long subsidized recovery ahead, said Mason, who teaches finance at Louisiana State University and offers bank-sector analysis at "Dr. Doom" Nouriel Roubini's RGE Monitor Web site.
Mason believes Citigroup is taking the right steps, prodded by federal banking regulators who are acting like a private-equity firm, using their big investment to force the right changes.
Citigroup cut its dividend and staff to preserve cash. It's selling off operations worldwide to focus on commercial banking. And it's replacing board members to embed this new strategy.
Though Mason thinks it will take years for the changes to move the stock to $6, Barclays Capital analyst Jason Goldberg is more bullish. He predicts $6 in a year. Deutsche Bank analyst Matthew O'Connor thinks earnings could return to $1 a share over the next few years, which would justify a $10 stock price. Don't be surprised to see a pared-down Citigroup get taken out for a premium at some point by Morgan Stanley (MS, news, msgs), which could use a large commercial bank.
Insiders have purchased significant amounts of this stock as high as $4, which makes $4 to $4.25 a reasonable entry point.
Buy below $4.25.
2. Sirius XM Radio
In late 2004, when the buzz surrounding Howard Stern's planned defection to satellite radio helped drive Sirius to crazy levels of $5 to $7 a share, it was tough to talk anyone, especially Stern fans, out of paying such an insane price for the stock.By late 2005, though, reality started to set in. Sirius stock began a long decline.
Last summer, sellers pushed the stock even lower after Sirius merged with rival XM Radio to form Sirius XM Radio (SIRI, news, msgs) on worries about excessive debt and recession-weary consumers tuning out satellite radio fees.
Video: Finding stocks for $10 or less
Now Sirius XM's stock sells for just 60 cents a share -- so low it looks like the crowd has it wrong once again. They're missing an impressive post-merger turnaround that has the company cutting costs while raising prices -- exactly what you want as an investor, said Scott Stevens of Strata Capital Management, a Beverly Hills, Calif., hedge fund. Strata’s investments are up more than 46% this year after fees as of Oct. 26, compared with 16.4% for the Standard & Poor's 500 Index ($INX). The fund owns Liberty Media Capital (LCAPA, news, msgs), which has a big stake in Sirius XM.
"You have two companies where almost every expense line was duplicative," Stevens said. Sirius XM has been cutting its staff. It also is reducing the price of content as it renews fat contracts negotiated back in the heyday of the Sirius-XM battle. All told, the company will cut more than $400 million in costs this year, Stevens said.
Meanwhile, Sirius XM is reaping more revenue per customer. So revenue is heading up even as the subscriber base slips. The company has also improved the terms of its deals with carmakers.
The bottom line: Cash flow is up enormously, Stevens said. The company recently projected cash flow (adjusted for unusual charges) of more than $400 million this year, compared with a loss of $136 million in 2008.
Barrington Research Associates analyst James Goss thinks the turnaround will boost cash flow by more than 30% a year for the next few years, to $751 million in 2011 from $439 million this year. He thinks this could propel the stock up 30% next year, to 80 cents a share, and make it double or more to $1.30 at some point in 2011.
Buy below 60 cents.
Continued: 3. Harvard Bioscience
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