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TheStreet Open House

2 Under-$5 Stocks Crying for a Buyout

Stock quotes in this article: NOK, SIRI

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( TheStreet) -- By and large, the world of sub-$5.00 stocks exists for suckers. Sure, you'll pull some winners out of the pile, but low-priced stocks are not all that different than out-of-the-money options. You can equate their "cheapness" with your low odds of having success trading and investing in them.

It's not that the low price of these equities causes your bad odds; rather, it should make you think about why they are so darn "cheap" to begin with. They're not inexpensive, they're flat out cheap.

With options, calls and puts get cheaper the farther out-of-the-money you go because as you drift away from the strike price, the odds decrease that your contract will go in-the-money leading up to or at expiration. Deep ITM calls and puts cost more the farther ITM you go for the inverse reason.

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With stocks, it's a different ballgame. Most represent sucker bets for reasons not associated with the trade itself. Stocks often get cheap because there's something wrong with the share structure, the company or both.

While not in sub-$5 territory just yet, Research in Motion (RIMM) provides a good example.

Throughout 2011, I advocated buying puts on RIMM. On the ride down, bulls and "value" investors continued to tell me that the time to be bearish on RIMM was over. They pointed to the price-to-earnings ratio, book value, RIM's patents and other data they could feed into quantitative formulas.

What they failed to realize is that, for a considerable period of time (and maybe forever), the market does not value stocks on the basis of those factors, no matter what your MBA textbook tells you. It values them based on present reality and future potential. At RIM, both timeframes have been and continue to be in utter shambles.

In this article, I discuss two stocks that trade where RIMM could very well be headed -- below $5. I elaborate on the prospects of, and need for, a takeover in each case.

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