Top Stocks Under $5 Beating the Market

BOSTON (TheStreet) -- Stocks under $5, such as eDiets.com (DIET) and Acceler8 Technology (AXK), have doubled this month, squashing the broader market and surprising investors who haven't heard of the penny-stock companies.

Almost 1,000 stocks under $5 on major U.S. exchanges are up only 2.4% in February, in line with the benchmark S&P 500. Last Friday, the S&P 500 had traded at its highest peak since the financial crisis started in September 2008. Protests across the Middle East sparked a rally in crude prices and triggered a pullback in equities.

Analysts expect stocks under $5, like Citigroup (S) and Sprint Nextel (S), will outperform this year, but those companies haven't been among the biggest winners in the new year. Instead, penny stocks including Evergreen Energy (EEE) and Independent Bank (IBCP) have surged as much as 500%.

Investors in penny stocks must be extremely careful with their investments, as their risks are among the highest in securities trading. For example, First Community (FCFL) dropped nearly 75% in February to 33 cents, Integra Bank (IBNK) has tumbled 59% this month to 31 cents and LECG Corp. (XPRT) is down 58% to 67 cents.

The risk of a sharp, quick selloff is elevated for investors in these companies. Fresenius Kabi Pharmaceuticals (APCVZ) contingent value rights (CVR) rallied nearly 60% in February until an announcement on Wednesday wiped out that gain and more.

In September 2008, Fresenius paid $23 in cash to acquire APP, although the deal also included a variable component of up to $6 depending on APP's adjusted earnings before interest, tax, depreciation and amortization (EBITDA) through 2010. However, adjusted EBITDA didn't meet the required threshold. Shareholders hoping they were holding a winning lottery ticket are instead left with nothing. The Fresenius CVR shares dropped more than 80% during Wednesday's trading session.

Still, many inexpensive stocks have generated huge returns for lucky stock pickers. The following pages detail the best-performing stocks under $5 in February, ranked by total return for the month.

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