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Investing in the under-$10 stock space can be interesting, exciting and nerve-wracking. But if you put the butterflies aside, the volatility can lead to large percentage gains, putting an exclamation point on the speculative portion of your portfolio.
One example of this is
Sirius Satellite Radio
, a stock we found in early October when screening for value plays -- stocks that traded a lot of shares but hadn't gained much in price during the past year. The company, which provides commercial-free satellite talk and music radio to 800,000 subscribers, appeared on our screen, and after some research into it, it looks like a winner.
We spent one entire weekend scanning the company's
filings to get a feel for what it's been doing, checking over its Web site to see how its offerings stacked up vs. competition, and visiting retail outlets here in New York to gauge how consumers were receiving the products in
. Needless to say, we were impressed.
We were immediately taken by how well CEO Joe Clayton had differentiated Sirius' service from competitor
XM Satellite Radio
. Sirius has a National Football League deal that gives it exclusive rights to broadcast all the games, not just the local action currently offered in most areas. That alone makes the story more attractive and gives it access to a demographic XM can't touch.
While Sirius' finances weren't perfect, with about $450 million in debt and negative cash flow from operations projected through 2007, the company did have enough leeway to sign more talent without significantly diluting shares or adding to debt balance.
We took a 2,000-share position in Sirius -- our largest to date -- with the stock trading at $3.14 a share. The company's technology, which allows users to travel anywhere a satellite can reach and listen to commercial-free music and talk programming, has the potential to change the radio landscape. That fits right into our Game Breaker classification that we apply to companies that are changing their industries and have the potential for
We also believed that the holiday buzz, increased sales through its retail partners like Radio Shack, and a ramp in factory installations by automobile manufacturers would drive better numbers and some analyst upgrades between then and year-end. The fact that investors hated this stock because of its murky financial structure and high-debt burden without bothering to probe how good its product and distribution channels were, made the story even more appealing because that creates the potential for more buying on good news.
The NFL deal alone had the makings of a good investment. The stock received a bigger push, though, when Howard Stern announced he was making the move to Sirius from Viacom-owned Infinity Broadcasting following a round of FCC fines and fights with management about the risque content of his program. The Stern announcement added gravitas to the satellite radio space and Sirius' credibility. The stock rallied 27% when it opened for trading on Oct. 6. We sold our stake in two lots for a total gain of about 27%, net of commissions. (Not bad for two days of trading, and that has contributed to our 7% return since May 24, vs. 17.5% for the Russell 2000 and 8.8% for the S&P.)
Not all of the trades in the under-$10 space will yield similar results, but Sirius offers a glimpse into what is possible when you do your homework and go against the herd on Wall Street. We are constantly seeking the next Sirius-like story and believe we have a handful of potential big winners in the portfolio now.
P.S. Remember, stocks priced under $10 have the potential to move quickly. So you might want to get our current recommendations now with a
to TheStreet.com Stocks Under $10.
William Gabrielski is a research associate at TheStreet.com and is accredited with a Series 7 license. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Gabrielski welcomes your feedback and invites you to send your comments to
Interested in more writings from William Gabrielski? Check out Stocks Under $10. For more information,
David Peltier is a research associate at TheStreet.com In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier welcomes your feedback and invites you to send your comments to