After falling sharply in the past six months, shares of
appear to have found a floor.
Yet weak earnings reports from both companies have sent each stock down another 20%-30% in Tuesday's trading. This is the main challenge investors in small-caps face in this market: Bad earnings reports can absolutely punish these stocks.
Sell-side analysts were caught off guard, as they seemed generally bullish on these names heading into the quarterly reports. Moreover, many media pundits were predicting that we have hit bottom in terms of share prices, as they likely already reflect a weak earnings outlook and a possible recession.
As investors in Novatel Wireless and Crox will tell you, this is clearly not the case.
We continue to see numerous risks in the small-cap space -- notably in the under-$10 universe -- as there remains more downside risk than upside potential in many situations, regardless of the fundamental growth profile.
For example, most small-caps that miss estimates are declining more than 15%, and those that happen to beat earnings estimates usually see a quick run-up in the stock price followed by a gradual selloff in the weeks ahead. This has become the norm, given that investors want to lock in profits in this tough environment, but also makes stock selection difficult.
That said, we are adding two stocks to our Stocks Under $10 Watch List:
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Last week, Rite Aid reported in-line fourth-quarter results, but weak guidance for the year ahead pushed the stock sharply lower. Looking at the bigger picture, gross margins beat estimates in the quarter, its integration of Brooks/Eckerd is gaining traction and should be completed within six months, and the company will be going up against easy comps in coming months.
The stock is currently trading at $2.39, almost 20% lower since the April 10 earnings report, but the risk/reward has become more favorable. We would like to see stock fall to the $2 level before initiating a new position.
Metalico recycles scrap metal, and the rise in metal prices has flowed straight to the bottom line. However, analysts' optimistic growth estimates are based on future acquisitions, so the company could have a minor setback when it reports earnings April 24.
This could provide an opportunity to pick up this inflation-hedged play (currently trading at $11.40) at a discount, as the outlook for metal prices is expected to continue rising due to limited supply and strong global demand. As always, we will wait until after the quarter before pulling the trigger.
Rite Aid and Metalico are on the watch list of TheStreet.com Stocks Under $10 service. Frank Curzio and Larsen Kusick, who manage TheStreet.com Stocks Under $10, write regularly about low-priced stocks, such as Wet Seal( WTSLA), Compuware (CPWR) and SkillSoft( SKIL) for TheStreet.com
In keeping with TSC's editorial policy, Frank Curzio doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Frank X. Curzio is a research analyst at TheStreet.com, where he works closely with Jim Cramer and writes
newsletter. He also hosts "The Real Story" -- a daily podcast on TheStreet.com on which he reviews the latest headlines and offers stock-picking advice. He is a regular guest on FoxBusiness News and previously was the editor of The FXC Newsletter and portfolio manager for Greentree Financial. He appreciates your feedback;
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