In 2003, Tim Melvin, the co-author of recent bestseller The Little Book of Value Investing with Christopher Browne from Tweedy Browne, told me about a system he tested for 2002. At the beginning of every month, buy every stock below $3 on the NYSE. Sell at the end of the month and begin again.
"The result," he told me, "was an over 200% return for 2002, the worst year in 30 years in the market."
I was impressed by this and have done various confirming tests since then, including a chapter on stocks below $5 in my book,
On Stockpickr, every month (actually, every few days) we are updating the list: All NYSE Stocks that are trading below $5. These stocks are profitable and have analysts with a buy recommendation.Then, when you look at the portfolio you can quickly see what hedge funds and super investors also own the stocks. These companies require a little more study than most because they are below $5 for a reason. That said, the potential for gain, and even for safety (as the Tim Melvin example attests) is enormous. For instance, Solectron (SLR) currently trades at $3.43, so it is on the list. A big electronics company that just designed a new device can outsource all the manufacturing to Solectron. The company is sitting on $1.04 billion in cash and has $641 million in debt, so there is almost $400 million net cash in the bank. With a market cap of $3.1 billion and Ebitda of $334 million, Solectron's multiple over cash flows is just 8 times, putting it in buyout territory. SLR is also increasing earnings.