5 promising stocks under $5

By Michael Brush

Here's one big upside to the down market: There are dozens of solid, low-priced stocks on sale.

That's good news because stocks going for less than the price of a Big Mac meal can be highly profitable. In a rebound they tend to move up a lot more than stocks with bigger price tags, in percentage terms.

There's reason for caution with under-$5 stocks, however. Companies with low share prices and tiny market capitalizations are speculative. So keep your position size small -- no more than 5% of your investment portfolio.

Enthusiasm for these small fry may not come back until investor confidence returns, so don't expect overnight gains. However, markets tend to price in changes in the economy about six months ahead of time. If the economy is going to rebound toward the end of this year, as some economists predict, these stocks could perk up within a few months.

That said, here are five promising names priced under $5:

A little inflation hedge: Gold

It may seem odd to worry about inflation while the economy shrinks faster than it has in years. But with Washington printing truckloads of money to stimulate growth, inflation will likely come barreling back.

As this risk sinks in, the price of gold will shoot up. Investors traditionally flock to gold to hedge against higher prices. "When inflation comes back, gold is going to go bananas," predicts Tom Winmill, who manages the Midas Fund (MIDSX).

By the end of this year, investors will begin pricing in inflation expectations. That will help boost gold to $1,000 an ounce by the end of 2009 from $925 recently, Winmill says.

Two other factors, he says, will push gold to $1,200 by the end of 2010:

• The huge U.S. deficit and Federal Reserve purchases of government debt will undermine the dollar. Gold tends to rise as the dollar weakens.

• Taxes on assets will go up to pay for the economic stimulus party. So the rich will move wealth out of easily taxed assets, such as land. Some of it will go into gold.

All this spells big potential gains for one of Winmill's favorite under-$5 plays: Northern Dynasty Minerals (NAK, news, msgs), which has a 50% stake in a huge Alaska gold deposit called the Pebble Project. The company estimates the deposit holds 57 million ounces of gold and 48 billion pounds of copper. Tom Meyer of Raymond James Financial (RJF, news, msgs) thinks copper could move to $3 a pound in 2010, double recent levels of $1.50 a pound.

Northern Dynasty may be relatively unknown, but it has a powerhouse partner in Anglo American (AAUK, news, msgs), a large and reputable mining company. The Pebble Project still has to clear environmental hurdles. Once that happens, the potential will start to unfold. Winmill believes the stock could move to $10-$15 in a few years, from $3.90 recently. Meyer thinks it could triple in a year.

Profits in the pipelines

Crosstex Energy Services (XTXI, news, msgs) suffers from a double whammy. It's been crushed with the energy group. And as a master limited partnership (MLP) operating natural-gas infrastructure, Crosstex has substantial debt. It borrowed a weighty $1.1 billion to build pipelines and processing plants.

Investors worry the credit crunch will make it hard for Crosstex to refinance that debt, causing it to sell valuable assets cheap. Or even worse, it might cut its dividend -- one of its main attractions. MLPs pay out virtually all profits as dividends. Crosstex now boasts a juicy 32% dividend yield.

But these fears are overblown, says Whitney Tilson, a co-manager of the Tilson Focus Fund (TILFX), which holds a big position in Crosstex. Only a small amount of debt comes due in the next two years, he says. After that, the debt markets should have improved. In the meantime, Crosstex is selling noncore assets, reducing capital spending and taking other defensive measures.

Besides, Crosstex holds pipes and processing plants serving two of the most promising natural-gas fields in the country: the Barnett Shale in Texas and the Haynesville Shale in Texas and Louisiana. So even in a worst-case scenario, in which the company had to be sold, "we think it would be at a significant premium to today's price," Tilson says.

A media mishmash

On the surface, Liberty Media Interactive (LINTA, news, msgs) seems pretty simple. It's a tracking stock that represents the value of the QVC home shopping networks, some retail Web sites and stock owned by its parent, Liberty Media, an unlisted company.

But there's a catch. That parent company is run by media mogul John Malone. Being the Energizer Bunny of deal making that he is, Malone has an intricate series of business regroupings and spinoffs planned for his empire.

Continued: Why Liberty Media is undervalued

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