In 2003, Tim Melvin, the co-author of recent bestseller The Little Book of Value Investing with Christopher Browne from Tweedy Browne, told me about a system he tested for 2002. At the beginning of every month, buy every stock below $3 on the NYSE. Sell at the end of the month and begin again.

"The result," he told me, "was an over 200% return for 2002, the worst year in 30 years in the market."

I was impressed by this and have done various confirming tests since then, including a chapter on stocks below $5 in my book, Trade Like a Hedge Fund.

On Stockpickr, every month (actually, every few days) we are updating the list: All NYSE Stocks that are trading below $5. These stocks are profitable and have analysts with a buy recommendation.

Then, when you look at the portfolio you can quickly see what hedge funds and super investors also own the stocks. These companies require a little more study than most because they are below $5 for a reason. That said, the potential for gain, and even for safety (as the Tim Melvin example attests) is enormous.

For instance, Solectron ( SLR) currently trades at $3.43, so it is on the list. A big electronics company that just designed a new device can outsource all the manufacturing to Solectron. The company is sitting on $1.04 billion in cash and has $641 million in debt, so there is almost $400 million net cash in the bank. With a market cap of $3.1 billion and Ebitda of $334 million, Solectron's multiple over cash flows is just 8 times, putting it in buyout territory. SLR is also increasing earnings.

Of the 12,000 or so portfolios in Stockpickr, only two non-pro portfolios hold Solectron. However, three very good hedge funds own the stock. One I'm a big fan of is Forest Hill Capital, run by ex-Morgan Keegan banker Mark Lee. They are specialists in both chip companies and obscure public companies from the Southeast. I once visited them in Little Rock and spent quite a bit of time getting to know them.

Solectron is also owned by value investor David J. Greene, a private firm founded at the tail end of the Depression in 1938. From their Web site: "The firm looks for undervalued securities that are misunderstood by the marketplace. Specifically they look for securities with low P/E, P/B and P/S but are generating good cash flow with a strong management team in place. The ideal candidate is a multi-segment business often possessing several growth-oriented segments hidden by slower growing parent. Other investors many times ignore these types of companies due to their confusing structure."

Looks like they might've found what they were looking for in Solectron. Here are all of Greene's top holdings. The third hedge fund that owns Solectron is Ritchie Capital.

Another name on the less than $5/profitable/NYSE list is Omnova Solutions ( OMN), which is trading at $4.71. It is a specialty chemical maker, an area I know nothing about, but analysts expect it to earn 45 cents a share next year, giving it a forward P/E of just over 10. Investor Guru Seth Klarman, whom I've written about here before, owns 19% of the company. Klarman is famous for writing the book, "Margin of Safety" based on Buffett's most important statement about investing ("always have a margin of safety"). It's impossible to find Klarman's book for less than $600 on eBay. Here are Klarman's top holdings.

To see the rest of the list of low-priced but profitable NYSE stocks, Margin of Safety>check it out in our Today's Lists section.

At the time of publication, Altucher and/or his fund had no positions in any stocks mentioned, although positions may change at any time.

James Altucher is a managing partner at Formula Capital, an alternative asset management firm that runs several quantitative-based hedge funds as well as a fund of hedge funds. He is also the author of Trade Like a Hedge Fund and Trade Like Warren Buffett. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback; click here to send him an email.

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