Markets & Finance

The Return of the Baby Stocks


Who doesn't love a low price on an attractive item? A recent Five for the Money on promising stocks for under $10 (see BusinessWeek.com, 5/26/06, "Baby Stocks With Room to Grow") proved very popular. So we'll take our cue from the movie studios and issue a summer sequel. We've found five more appealing equities that can be had for less than the price of a big-city movie ticket.

One other appeal for stocks with a low trading price: Investors can more easily buy them in "round lots," which is broker-speak for quantities of 100 shares. Buying round lots can help investors avoid extra transaction fees.

Low-priced stocks—typically small-caps—can be a mixed bag, of course. Catch a company on the rise and it can mean huge gains. But investors must also understand that there's probably an explanation for the markets' lack of enthusiasm. In other words, sometimes a stock carries a low sticker price for a good reason.

Small companies do, on occasion, disappear. So we made sure that the outfits we listed this week had some heft to them: Each had to have at least $100 million a year in revenue. It's not an enormous sum for a public company, but it's a benchmark of some note. As always, investors should be extra diligent when looking at these stocks.

Here's our low-priced list:

1. Coeur d'Alene Mines

In an industry with high barriers to entry, mining stocks tend to be expensive. Coeur d'Alene Mines (CDE), a major silver miner with positions in other metals, is an exception. Trading around $5, it might be a steal.

Coeur d'Alene's stock has taken hits for a few months as the price of silver has fallen from $15 per ounce in May to below $12 now. According to a July 2 note from Deutsche Bank (which seeks to do business with the companies it covers), silver was "overhyped" at $15. The broker rates Coeur a buy with a $7 target price.

In a May report, Deutsche wrote "we continue to like the 'silver story' where the commodity should continue to benefit from strong industrial demand, limited supply growth, and investment interest." And Coeur d'Alene Mines has a demonstrated record of boosted revenues from metal sales; it has climbed from $70.6 million in 2001 to $172.3 million in 2005. The company also returned to profitability in 2005 with a net income of $10.6 million.

2. Lions Gate Entertainment

Investors have plenty of good reasons to worry about the movie business: The Internet absorbs free time that used to be spent at the multiplex, and the industry's DVD growth engine has begun to sputter. Still, Lions Gate Entertainment (LGF) could roar, or at least purr, for patient investors.

With offices in the U.S. and Canada, this profitable studio and distributor is known for grisly horror flicks like Hostel and Saw, and artier grownup fare like Crash, this year's Oscar winner for best picture. And crucially, Lions Gate has a DVD library with thousands of titles, which can represent a welcome cushion in the notoriously volatile movie biz. On July 12, the company bought another asset, Debmar-Mercury, which owns the distribution rights to the hit show South Park, among other properties.

Michael Kelman, an analyst with Susquehanna Financial Group (which seeks out relationships with the companies it covers), is impressed with management for making movies on a tight budget. Even so, he rates the stock neutral on account of its unpredictable sector.

By making movies for $20 million or less, Lions Gate "does a good job with the assets that they have," Kelman says, pointing out that the company is moving from staged movie releases to opening movies on more screens simultaneously. The switch reflects the greater weight of a movie's opening weekend on its final box-office take and increases the potential for profit and risk.

3. Nuance Communications

Speech-recognition technology isn't perfect yet, but Nuance Communications (NUAN) has been capitalizing on its growing popularity. The company's speech-recognition technology is used by, among others, call centers and car navigation devices. For the year ended last September, the company had $232.3 million in revenue and a 5-cent net loss per share.

In June, investment firm Friedman, Billings, Ramsey (which makes a market in Nuance stock) projected revenues of $399 million for the company in fiscal 2006. It rates the stock a buy, stamping it with a $12 price target. In February, Nuance acquired old-line outfit Dictaphone, which focused on dictation and speech-recognition applications and services for the health-care industry, a move applauded by FBR.

One word of caution: The broker warns that Nuance's flagship speech-recognition technology will face increasingly tough competition from giant companies suchas IBM (IBM) and Microsoft (MSFT) looking to make their voices heard in this segment. Though their programs now have much smaller market share than Nuance, they'll have plenty of resources for the fight.

4. Landec

Menlo Park (Calif.)-based Landec's (LNDC) Intellimer polymers are designed to alter their physical traits—like permeability and adhesion—with changes in temperature. The company licenses out the materials for a variety of uses, but so far it appears to have found a niche in food packaging, where its technology helps control levels of carbon dioxide and oxygen in the bag and enables iceless shipping, reducing freight costs.

Landec polymers wrap the Eat Smart line of pre-cut vegetables—broccoli slaw, anyone?—sold by subsidiary Apio, which it purchased in 1999. Chiquita (CQB) also uses Landec polymers to wrap individual bananas, a growing initiative. The company also licenses polymers for other uses, including personal-care products.

Roth Capital Partners, a Landec market maker, believes the company has hit on a smart mix of partnerships and licensing agreements. "We look for rapid earnings growth over the next several years," states a recent Roth report.

Indeed, for Landec, the situation looks fresh. For the quarter ending in February, it boosted revenues about 11% year over year to $57.2 million, raising earnings per share to 13 cents, up 4 cents.

5. Ixia

Internet protocol testing outfit Ixia (XXIA) could also be poised for a surge. Joanna Makris, an analyst with Canaccord Adams, which has a banking relationship with the company, says the company may benefit from the increasing prevalence of so-called triple-play services that provide fast Internet, digital cable television, and telephone. Ixia's clients include equipment manufacturers and service providers.

The last few months have been rocky for the stock; since trading over $14 in March, Ixia has fallen to the $8 neighborhood. Makris attributes that to the general "macro downturn" in the stock market and price cutting from competitor Spirent (SPM). Ixia's operational expenditures have also grown as the company has built up its sales team, a resource it bets will pay off in the future.

So far the triple-play situation has not been a major revenue generator, but Makris says, "You need to buy ahead of the revenue." The company has already shown its ability to grow. Net income was $33.7 million in 2005, up 78% from 2004. In May, at $11.38, Makris rated Ixia a buy with a $14 target price. Now that the stock has dropped below $10, she's sticking to her bullish call.


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