$10 and $20 Stocks That Can Make You 20%

The most interesting name in this group is Chung Hwa Telecom (CHT Quote), one of the largest telecommunications companies in Taiwan. It has a legacy fixed-line business, but it is increasingly focusing its attention on wireless customers. The government of Taiwan owns most of Chung Hwa and would like to spin out more to the public, although it has encountered resistance from union members. With a 6.5% dividend yield, it only needs to get to around $22.80 over the next 12 months to dial in a 20% return.

Among the rest, Hornbeck Offshore (HOS Quote) looks a bit overextended at the moment. It may backtrack before heading toward the 20% goal. Among the smaller names, Eclipsys (ECLP Quote), which sells administrative and financial software to hospitals, looks like it could find favor as it is breaking out on good volume amid signs that it could finally turn profitable next year after several years of losses.

I'll check in with these stocks in six months to see how far they've gotten. If you have any other $10 or $20 stocks -- and not ones priced at $12 or $8 or $17 or $23 -- that you think could gain 20% next year, email me and let me know why.

Fine Print

My Thanksgiving column yielded a feast of responses to my request for opinions on which beaten-down "M" stock would do best next year. These M stocks, you may recall, were chipmaker Maxim Integrated Products (MXIM Quote), drugmaker Merck (MRK Quote) and insurance broker Marsh & McLennan (MMC Quote).

Mail was incredibly detailed and imaginative, and thank you for all of it. Several readers chided chipmaker Maxim as a lousy choice because its management refuses to expense options. Many said Marsh & McLennan would not have a future because it lost the one asset that a broker has: trust. And several said they thought Merck would be tied up in lawsuits forever, making that a poor choice.

But value stocks always have a lot of hair on them. That's why their prices are so depressed. So many readers came up with reasons to buy each. Maxim was deemed the best choice because its diversified range of products for the digital and analog world made it an ideal company to own in a modestly expanding economy that relies on semiconductors.

Many readers said they liked Merck because they believed its phalanx of lawyers would help it avoid serious prosecution. Plus, they said, the legal claims aren't as severe as they appear on the surface.

Finally, a chorus of readers said the woes at Marsh were a big to-do about nothing. Ultimately, they said, its retroactively criminalized commission system would reappear in a more legal fashion down the road after the company's liability insurers paid a fine to settle with New York Attorney General Eliot Spitzer.

I see merit in all three of these stocks, but I would put money on Maxim and Merck and treat Marsh with more skepticism. Maxim's options expensing is a nefarious -- but not illegal -- practice that investors have willfully ignored. The stock is expensive but will find favor with investors again -- if not in 2005, then in 2006 or 2007.

Merck will probably escape the worst-case scenario and has a shot at coming back strong over the next few years. As far as Marsh goes, it is still hard to understand how the company can win back its customers' confidence and replace its lost earnings. It has no hard assets and no economic moat to prevent customers from moseying over to rivals. But new management might sweet-talk its way back into companies' good graces, which will make Marsh by far the most fascinating company to watch over the next year.

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Please note that due to factors including low market capitalization and/or insufficient public float, we consider Alliance Imaging, Pioneer Drilling, Interwoven, Government Properties Trust, Cardinal Financial and Hornbeck Offshore Services to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.