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Top 10 'Buy'-Rated Stocks Under $5

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10. Paetec Holding (PAET)

Company Profile: Paetec Holding provides data and voice communication services to enterprises and other telecom carriers. The company recently acquired Cavalier Telecom, which has added to sales, but Paetec is still struggling to recover from the recession.

Share Price: $3.23 (March 29)

Stock Performance This Year: -13%

Analyst Consensus: Of the 13 analysts following Paetec, seven have a "buy" rating on the stock and the other six say investors should hold shares. The average price target of $5.46 represents 66% upside potential.

Bullish Case: D.A. Davidson analyst Donna Jaegers upgraded Paetec to "buy" on March 10, arguing that if Paetec gains traction on sales of higher bandwidth services in the Northeast, revenue estimates are probably too conservative. "Also, a faster-than-expected economic rebound could also increase revenues," Jaegers wrote, adding that the stock offers 27% price upside based on the firm's target of $4.50.

Meanwhile, TheStreet Ratings has a "sell" rating on the communications company, noting that the stock has considerably underperformed the S&P 500 and the diversified-telecom-services industry. "The company's weaknesses can be seen in multiple areas, such as its deteriorating net income, weak operating cash flow, generally disappointing historical performance in the stock itself and feeble growth in its earnings per share," TheStreet Ratings wrote in a March 20 report.

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