Top 10 Buy-Rated Stocks Under $5

BOSTON ( TheStreet) --Stocks trading under $5 typically have no analyst coverage, never mind a buy rating, leaving investors to do the homework for themselves. However, a select few under-$5 stocks have very favorable coverage from analysts, which can heavily influence share price movements. The following 10 U.S. stocks trade below $5 and have garnered the most buy ratings from analysts.

10. Paetec Holding ( PAET) offers voice and data services to large- and small-sized business customers in metropolitan areas. Shares have fallen 18% in the last month but have climbed 22% over the last year.

Consensus: Of the analysts covering Paetec, seven, or 53.9%, argue that the stock will outperform, while six analysts recommend holding shares.

Closing Price: $4.02 (June 2)

Bullish Case: Collins Stewart, which has a buy rating and $6 price target on Paetec, argues that as the decline in the company's wireline business "becomes less of a drag upon results and as it crosses back over to positive revenue growth, starting this quarter, investors will accord a higher multiple to its valuation."

Bearish Scenario: Deutsche Bank, which has a hold rating and $4.20 price target on Paetec shares, says that "while positive on the company's ability to rebound from economic pressures and leverage its recent acquisitions, we have yet to gain visibility into sustained improvement to macro-employment levels, which tend to lead enterprise revenue trends by three to four quarters."

9. FuelCell Energy ( FCEL) is, as the name implies, a developer of fuel cell technology in the United States and abroad. The company manufactures fuel cell power plants for electric power generation. Shares have dropped more than 23% over the last month and more than 43% over the last year.

Consensus: Of the analysts covering FuelCell Energy, seven, or 70%, recommend purchasing the stock. Two analysts recommend selling the stock, and another advises holding it.

Closing Price: $2.13 (June 2)

Bullish Case: Thomas Weisel Partners said in March that FuelCell Energy has "multi near-term catalysts on the horizon," including further support in the South Korea market as well as the likely addition of two to three European partners in 2010. The firm has an outperform rating on FuelCell and a $5 price target.

Bearish Scenario: In an earnings preview ahead of the company's June 7 second-quarter report, Canaccord Genuity cut its price target to $4.50 from $6.25, citing compressed multiples across the energy-tech group. The firm maintained its buy rating, although Canaccord highlighted some of the investment risks to FuelCell. They included limited market acceptance of the company's fuel cell product, which is in the very early stages of commercialization. "While cash balances and liquidity are adequate in the near term, FuelCell may need to raise additional capital until the company reaches break-even," the firm added.

8. Achillion Pharmaceuticals ( ACHN) shares spiked last month after the company said Phase 1b clinical trial data showed its ACH-1625 treatment in third and fourth patient cohorts achieved "meaningful reductions in HCV RNA after five-day monotherapy, with continued safety and tolerability in patients with hepatitis C." The stock is down more than 11% over the last month, but has nearly doubled in price over the last year.

Consensus: Of the analysts covering Achillion, seven, or 77.8%, recommend purchasing its shares and two recommend holding them.

Closing Price: $2.33 (June 2)

Bullish Case: Roth Capital Partners has a buy rating and $12 price target on Achillion, which calls for quite a bit of upside based on current levels. "Achillion's strong clinical performance with ACH-1625 to-date, we believe should be of strong interest to investors looking to be involved in the Hepatitis C virus (HCV) space. We believe the drug's profile to-date make it a very attractive partnering candidate," the firm wrote in a research note late last month.

Bearish Scenario: JMP Securities, which has a market perform rating on Achillion, argues that while the company's protease inhibitor looks good so far and suggests potential for once daily dosing, more safety data is needed. "Given how crowded the HCV protease inhibitor class is, combined with the move toward oral combination therapy, we think safety is what will ultimately differentiate these compounds," the firm said.

7. Magnum Hunter Resources ( MHR) is an oil and gas explorer that has seen its share price skyrocket more than 500% since July 2009. In 2010, Magnum Hunter Resources shares have climbed nearly 200%.

Consensus: Of the analysts covering Magnum Hunter Resources, seven, or 87.5%, recommend purchasing shares and one recommends holding them.

Closing Price: $4.65 (June 2)

Bullish Case: Pritchard Capital Partners recently reiterated a buy rating on Magnum Hunter Resources with a $6 price target, noting that the company has a growing asset base in some of the strongest shale plays in the United States, namely the Marcellus shale in Appalachia, Bakken in North Dakota and Eagle Ford in Texas. "With approximately 42,000 net Marcellus acres that are predominantly held by production, MHR is the most levered company to the play on the basis of acres per million dollars of Enterprise Value," the firm wrote in a research note.

Bearish Scenario: With a buy rating and $5.75 price target, KeyBanc Capital Markets notes several positive catalysts for Magnum Hunter Resources in the coming months. But the firm also highlights a few of the risks facing investors in the stock, including difficulty funding its capital spending plans and a lack of execution of its development strategy in the Marcellus, Eagle Ford, and/or Bakken shales. "MHR has approximately 8.6 million warrants outstanding, which may be exercised into common stock and thus would be dilutive to common shareholders," the firm added.

6. Arena Pharmaceuticals ( ARNA), which is currently seeking approval of its weight loss drug lorcaserin, has seen its share price fall 10% in 2010 thus far. The Food and Drug Administration has tentatively scheduled an advisory committee meeting to review the company's new drug application for lorcaserin on Sept. 16.

Consensus: Of the analysts covering Arena, eight, or 40%, advocate buying the stock. The other 12 analysts rating the stock suggest that investors hold it.

Closing Price: $3.23 (June 2)

Bullish Case: Davenport analysts have a buy rating for speculative investors in Arena, noting that lorcaserin's new drug application has reasonable chances of gaining approval from the FDA given the "extensive base of 7,000 plus patients that participated in the Phase III trials," which showed "very good tolerability." The firm has a price target of $5 to $6 a share.

Bearish Scenario: JMP Securities, which has a market perform rating on Arena, says that while the firm remains confident that lorcaserin "demonstrated an approvable efficacy profile in Phase III based on the current FDA guidance and a favorable safety profile, any indication that the FDA is looking for greater weight loss would be viewed as negative for lorcaserin."

5. Ariad Pharmaceuticals ( ARIA) is a biotech company focused on development of targeted oncology therapies. The company's lead compound ridaforolimus is currently in a Phase III trial for sarcoma. Ariad shares have surged 62% in 2010 and are up more than 150% over the last 12 months.

Consensus: Of the analysts covering Ariad, eight, or 80%, recommend purchasing its shares and two recommend holding them.

Closing Price: $3.74 (June 2)

Bullish Case: Leerink Swan analysts have a buy rating and $6 valuation on Ariad, noting that the current ridaforolimus trial has a "good chance to be ultimately positive." The firm says that Ariad's partnership with Merck ( MRK) "will supply a potentially significant royalty stream," even though "further financing may be needed to support the remaining pipeline before reaching profitability."

Bearish Scenario: Oppenheimer analysts have an outperform rating and price target of $6 for Ariad, arguing that it expects a "good probability of a positive outcome from the trial at the final analysis." The firm does note that "there could be some disappointment that the second interim analysis did not yield a positive result," although the analysts view any weakness in the stock as a buying opportunity.

4. Anadys Pharmaceuticals ( ANDS) is a biopharmaceutical company developing drugs for the treatment of Hepatitis C virus (HCV) and oncology. The company recently said it is mulling options for its hepatitis C drug candidate ANA-598, retaining Lazard Freres as a strategic advisor. The stock is up 18% in 2010 and more than 25% over the last year.

Consensus: Ten analysts covering Anadys, or 76.9%, say investors should buy the stock, while three recommend holding it.

Closing Price: $2.49 (June 2)

Bullish Case: ThinkEquity notes that Anadys management has "taken steps to position ANA598 to be transitioned to a partner through a licensing or outright acquisition" and the firm says it believes the company "is very optimistic about finding a home for ANA598 over the coming months." ThinkEquity has a buy rating and per-share fair value estimate on a risk-adjusted basis of approximately $7.

Bearish Scenario: Wedbush analysts have a neutral rating on Anadys shares, questioning whether ANA598's profile will be attractive enough for a partnership. "A partnership or sale of the company is critical both from a development as well as a financing perspective," the firm wrote.

3. Citigroup ( C) is quite often the most heavily traded U.S. stock, with an average daily share volume of more than 810 million. Recently, the Treasury Department began selling its Citigroup stake, which was acquired as part of the Troubled Asset Relief Program, or TARP. The bank's stock has famously failed to maintain the $5 level, although shares are up nearly 20% in 2010.

Consensus: Of those with a rating on Citigroup, 11 analysts, or 44%, recommend purchasing the stock. Another 10 analysts advise holding them, and four, including Meredith Whitney, say investors should sell Citigroup shares.

Closing Price: $3.92 (June 2)

Bullish Case: On Wednesday, Rochdale Securities analyst Dick Bove said Citigroup's stock is trading at a slight discount to its tangible book value. "This means the company is selling below its liquidation value," Bove wrote. "The true value of Citigroup is well in excess of its current stock price. Some of its hidden asset values are now being recognized. It is led by a very capable CEO. The stock is seriously undervalued." Bove has a buy rating and $6.90 price target on Citigroup shares.

Bearish Scenario: In April, Collins Stewart analysts upgraded Citigroup to hold, noting that while there are "signs of a nascent turnaround for the company," there is an overhang on the stock due to the Treasury's sale of its stake in the bank. Risks to the firm's $6 price target include a deteriorating credit and macroeconomic environment and more restrictive constraints from regulators, Collins Stewart analysts wrote.

2. Art Technology Group ( ARTG) is a developer of e-commerce software for many well-known companies, including retailers like Best Buy ( BBY), Macy's ( M), Amazon.com ( AMZN) and even non-retail names like Citigroup and AT&T ( T). Shares have fallen nearly 20% in 2010 and 2% over the last 12 months.

Consensus: Of the analysts covering Art Technology, 11, or 91.7%, advise purchasing its shares and one recommends holding them.

Closing Price: $3.65 (June 2)

Bullish Case: Deutsche Bank has a buy rating and $6 price target on Art Technology Group, arguing that the company "demonstrated its strong market positioning and was able to take advantage of the improving macro environment" in the first quarter.

Bearish Scenario: Although Wedbush analysts have an outperform rating and remain bullish on Art Technology's longer term growth prospects, they say risks to the firm's $5 price target include "changes to IT spending patterns, dependence on seven-figure transactions, declining e-commerce growth rates, a transitioning business model that creates volatility in revenue and earnings per share , and a minimal build-out of a global partner network."

1. RF Micro Devices ( RFMD) is a mobile phone chip maker that has seen its share price surge 64% over the last 12 months. On April 27, RF Micro came in well ahead of analysts' estimates with its fourth-quarter results.

Consensus: Of the analysts covering RF Micro Devices, 12, or 60%, recommend purchasing the stock. Another six analysts recommend holding shares, and two suggest selling them.

Closing Price: $4.84 (June 2)

Bullish Case: Sterne Agee, which has a buy rating and $5 price target on RF Micro, notes that the company "has almost 40% share of the front-end power amplifier market for handsets. Increasing traction with smartphones and 3G penetration should be a tailwind for the power amplifier suppliers."
More Buy-Rated Stocks
Top 10 Buy-Rated Stocks with Special Dividend Potential

Bearish Scenario: Williams Financial Group has a sell rating on RF Micro. "While progress is being made, the firm continues to have Nokia ( NOK) as its largest customer exiting the year at just under 50% of sales," the firm writes. "With Nokia not being the strongest of the OEMs in recent handset designs, we believe RFMD's exposure to the supplier puts the firm's earnings at risk."

-- Written by Robert Holmes in Boston.

Follow Robert Holmes on Twitter and become a fan of TheStreet.com on Facebook.