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10 Top Stocks Under $5 for 2012 Picked by Analysts

Stocks in this article: SIRI S MHR PWER HT HERO LCC

BOSTON ( TheStreet) -- Sprint Nextel (S) and U.S. Airways (LCC) may be the best inexpensive stocks for 2012 -- if analysts are to be believed.

After a rollercoaster ride in equity markets this year, investors are more than willing to look ahead to 2012. Record volatility has forced investors out of riskier assets and into large-cap stocks with dividends -- or completely out of the market altogether. Some risk-averse investors have piled into U.S. Treasuries, an incredibly irrational move considering the 10-year Treasury yields less than the rate of inflation.

While some investors will continue on a path of safety heading into 2012, others may find more opportunity (and risk) in stocks trading under $5, which typically don't receive attention from mutual funds due to their miniscule share prices. Many low-priced stocks have proven to be winners, including TeamStaff (TSTF), Majesco Entertainment (COOL) and Adolor (ADLR), all of which have more than tripled this year.

For potential winners of the coming year, analyst recommendations are one good source of opinions. Stocks trading under $5 typically have zero coverage from Wall Street -- never mind a "buy" rating -- leaving investors to do the homework for themselves. However, a select few boast of favorable coverage from analysts, which can have a strong effect on share-price movements.

Of course, using analysts' ratings alone isn't a wise investing strategy. As it turns out, the stocks with the most "buy" ratings headed into 2011 were mostly losing bets. Of the 10 stocks on last year's list, only two were winners. Achillion Pharmaceuticals (ACHN) and Ariad Pharmaceuticals (ARIA) are up 71% and 143%, respectively, so far in 2011.

To give you an idea of how badly the other eight stocks performed this year, a portfolio of all 10 stocks with equal weightings would have a return of minus 23% this year. By comparison, the Russell 2000 -- an index of small-cap stocks -- is down only 5% this year. The worst performer of the bunch was General Maritime (GMR), which filed for Chapter 11 bankruptcy last month.

Betting on small-cap penny stocks is a risk, for sure, but it's one plenty of investors might want to take. The following 10 U.S. stocks trade at less than $5 and have garnered the most "buy" ratings from Wall Street analysts. It remains to be seen if those votes of confidence will lead to high returns over the next 12 months.

10. Sirius XM (SIRI)

Company Profile: Sirius XM is a subscription satellite radio company, created in the 2007 merger between Sirius and XM Radio.

Share Price: $1.90 (Dec. 2)

2011 Stock Performance: 16%

Analyst Consensus: Sirius XM shares had an impressive run again this year, although investors can't be happy that the stock trades below $2 after rising as high as $2.44 earlier this year. That said, Sirius XM is only one of two stocks that made this list that also gained ground in 2011. Analysts are looking for more upside in 2012, with 9 of the 12 researchers following the stock saying that it is a "buy."

Bullish Case: Barrington Research analyst Jim Goss, who has an "outperform" rating on Sirius XM with a price target of $2.40, raises the idea that the company could initiate a share buyback in 2012 to reduce the massive number of shares outstanding.

"Sirius XM Radio continues its story of redefining its growth and profitability potential. Subscriber counts continue to rise, helped importantly by much improved auto sales trends," Goss wrote in a Nov. 28 research report. "Financial position continues to improve, positioning the company to seriously consider the return of capital to shareholders, potentially involving a share buyback as early as next summer."

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