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Hidden Stock Gems For Less Than $10

Frank Curzio

Over the past 12 months, we have seen an unprecedented collapse in the equity markets and have witnessed the worst economic crisis since the Great Depression.

Most investors with whom I spoke during the holiday season were talking about the monumental selloffs in bellwethers like General Electric(GE Quote), Caterpillar(CAT Quote) and Research In Motion(RIMM Quote) -- which have lost more than half of their value.

Because my job is to invest only in stocks under $10, you don't have to tell me how difficult the market is. The stocks mentioned above could be viewed as winners compared to most in my universe, where values are down more than 75% despite solid balance sheets and strong quarterly results.

In a market in which most pundits are recommending dividend-paying stocks and consumer staples, there has been a huge disconnect in some under-$10 stocks over the past couple of months. That's resulted in very solid returns for several positions in the Stocks Under $10 model portfolio.

For example, gold prices fell 25% since July, but most gold stocks were down in excess of 60% in the same time frame. That includes Yamana Gold(AUY Quote), which fell to $4 a share before I recommended it. Even the biggest gold bugs are not expecting inflation in the short term. The outlook for commodities is looking up, with the Fed announcing it will spend as much as it takes to stimulate growth and lowering its key rate to near zero and with the dollar likely to remain weaker over the next few quarters.

Yamana is up more than 70% since my initiation a little over a month ago, and we already booked some profits.

The story is similar for oil companies, with crude dropping from $149 a barrel to under $40 this year. Many under-$10 energy stocks with solid balance sheets are down 80% or more. Investors are already pricing in $25 a barrel, which provides a limited downside risk and above-average upside potential.

One stock I like is WSP Holdings(WH Quote). The oil service company has a strong balance sheet with no long-term debt. It just raised guidance and has seen a huge drop in steel prices -- its largest cost. The stock has been under pressure with the rapid decline in crude, but if oil holds near the $25 to $30 level, I believe WSP has significant upside in the short-term.

Another example of a beaten-down stock is Imax(IMAX Quote). Last month, The Day the Earth Stood Still, starring Keanu Reeves, topped the box office. More important, the average revenue per theater for Imax was more than $30,000, compared with the national average of just $8,700. This is significant, given that media companies are struggling for profits.

Attendance for these films is not only three times higher than for standard releases, but ticket prices are also $2 to $5 higher. Many action-film directors are now making movies in 3D format, and Imax's pipeline continues to grow by the month, with potential blockbusters that will likely lead to significant profit growth in the foreseeable future.

I added to my position in Imax on Dec. 12, and since then, shares are up 50% to $4.45 in less than three weeks.

Since taking over this newsletter more than two years ago, I have never seen more quality names trading for under $10, including Manitowoc (MTW Quote), Ashland(ASH Quote), Focus Media(FMCN Quote) and Dry Ships(DRYS Quote). There are many stocks in this range that were traded above $50 earlier in the year. Also, roughly 20% of the S&P 500 now trades under $12 -- which is the largest amount that I have seen at least four years.

The market will become increasingly difficult to navigate in 2009 as the Fed uses quantitative easing (measures never used before) to stimulate growth. Also, economic data will get worse before it gets better; financial companies are still not lending; and most companies have provided little guidance heading into next year.

However, there are huge opportunities that lie ahead that sometimes are provided only during bear markets. In fact, Apple(AAPL Quote) and Potash(POT Quote) were both trading under $10 in 2002, the last time we saw global growth slow to 3% or less. Both of these stocks hit $200 at their peak. While it is nearly impossible to buy at the low and sell at the absolute top, these examples highlight the opportunities that are available in the single-digit universe.

Janus Capital(JNS Quote), Dry Ships(DRYS Quote) and Huntsman(HUN Quote)are currently on the watch list of the Stocks Under $10 service.. For a holiday offer of a $149 annual subscription through Dec. 31, click here.