Top 10 Penny Stocks of 2010

NEW YORK ( TheStreet) -- The Great Recession produced a slew of penny stocks for speculative investors, with many stock prices falling below the $3 per share threshold during the throes of the bear market.

For a handful of penny stocks, the returns have been massive over the first six months of the year.

TheStreet found the top 10 penny stocks performers of 2010, ranked by total returns, and we offer a look at what may be in store for investors in those companies for the remainder of the year.

10. LGL Group ( LGL) is an electronic components manufacturer based in Orlando, Fla. The stock finished 2009 at $3.29, around where it traded for most of the year after falling more than 75% in 2008.

Closing Price: $13.24 (June 16)

Total Return (YTD): 302.4%

Developments in 2010: LGL Group shares have returned to pre-recession levels, trading recently at a 52-week high of $14.20. In March, LGL Group posted a fourth-quarter profit of 15 cents a share, swinging from a year-ago loss of 5 cents a share. For an encore, LGL said in May that it had a first-quarter profit of 47 cents a share, swinging from a year-ago loss of 46 cents a share.

Valuation: Like SMTC, LGL Group has seen volume pick up in 2010 as the stock has surged. And much like SMTC, the company offers investors an attractive price-to-sales ratio of 0.87. That compares to its peer group average of 11.38. However, a price-to-book ratio of 2.98 is nearly twice the average of the electronic and electrical equipment sector, according to Bloomberg.

9. SMTC ( SMTX) is an electronics manufacturing services provider based in Toronto. Shares finished 2009 at 88 cents after spending most of the year trading below the $1 mark.

Closing Price: $3.56 (June 16)

Total Return (YTD): 304.6%

Developments in 2010: In March, SMTC reported a fourth-quarter profit of 16 cents a share, doubling the single-analyst estimate and sending shares higher. SMTC followed that in May by reporting first-quarter earnings from continuing operations of 14 cents a share compared with a year-ago loss of 6 cents a share. Later in May, SMTC said it amended loan agreements with Wells Fargo Capital Finance Corp. and Export Development Canada to refinance its short- and long-term debt. In June, SMTC said it adopted a rights plan, or "poison pill," designed to protect the company's approximately $100 million in U.S. federal net operating loss carry-forwards (NOLs).

Valuation: SMTC shares are trading just below their 52-week high of $4.30, and the company has seen a sharp uptick in share volume to levels not seen since the stock traded above $7 per share in 2007. SMTC shares currently have a price-to-book ratio of 2.49, which is expensive compared to peers in the electronic and electrical equipment sector. However, the stock has a minuscule price-to-sales ratio of 0.27, which is well below the sector average of 2.64, according to Bloomberg.

8. Wabash National ( WNC) is a truck trailers and transportation-related equipment maker based in Lafayette, Ind. Shares spent most of 2009 in penny-stock land after the company suspended dividend payments and sought a capital infusion, finishing the year at $1.89.

Closing Price: $8.24 (June 16)

Total Return (YTD): 336%

Developments in 2010: Wabash National secured a three-year purchase agreement with Swift Transportation in March, and a month later the company announced a three-year purchase agreement with Prime Inc. In May, Wabash National reported a first-quarter net loss of $139.1 million, or $4.64 a share, on net sales of $78 million. That compared to a year-ago loss of 94 cents a share on net sales of $78 million. Shares pulled back from their 52-week high of $10.69 following the earnings release. The stock fell further after Wabash National priced an offering of 11.75 million shares of common stock at $6.50 per share, with net proceeds used to repay debt.

Valuation: A total of three analysts cover Wabash National and all three have buy ratings on the stock. With an average stock price target of $14.33, analysts are predicting that Wabash shares will nearly double over the next 12 months. Before the recent pullback after the stock offering was announced, Wabash National shares were trading at levels before the company suspended dividend payments in December 2008. Wabash National has a price-to-sales ratio of 0.71, offering investors a discount to that of other commercial vehicle and truck makers, which have an average price-to-sales ratio of 1.49, according to Bloomberg.

7. Somaxon Pharmaceuticals ( SOMX) is a specialty pharmaceutical company, based in San Diego, that focuses on treatments for diseases in the central nervous system

Closing Price: $4.94 (June 16)

Total Return (YTD): 357.4%

Developments in 2010: In March, the Food and Drug Administration approved Somaxon's Silenor as a new treatment for insomnia, news that pushed the company's stock above $9 per share. Jumping at the opportunity, Somaxon offered 6.9 million shares of common stock at the end of March at $8.25 per share. The stock has been on a steady slope down since and even a shrinking first-quarter net loss (announced in May) has done little to stem the decline. CEO Richard Pascoe said Somaxon will spend the second half of 2010 seeking a U.S. commercial partnership, building a U.S. commercial presence and preparing to launch Silenor.

Valuation: Only two firms (Oppenheimer and Jefferies) cover Somaxon, and both have a buy rating on the stock. With a price target of $13, Jefferies expects a 166% return over the next year. From a book value perspective, Somaxon's price-to-book ratio of 2.96 is below the pharmaceutical and biotech sector average of 5.27, according to Bloomberg. If the company were to find a commercial partner in the U.S., it may help stop the share price from sliding further from the March highs.

6. Cost Plus ( CPWM) is a home furnishings retailer based in Oakland, Calif. The stock traded above $40 at the beginning of 2004 and were on a steady decline, falling below $1 for much of 2009. Cost Plus shares finished last year at $1.02.

Closing Price: $4.68 (June 16)

Total Return (YTD): 358.8%

Developments in 2010: In March, Cost Plus swung to a fourth-quarter profit of 95 cents a share from a loss of 83 cents a share in the year-ago quarter. A month later, the company ended its shareholder rights plan earlier than planned. Cost Plus said in May that it had a first-quarter loss of 47 cents a share, although that narrowed from a loss of $1.88 a share in the year-ago quarter. For the second quarter, Cost Plus said it expects revenue to fall in a range between $189 million and $192 million.

Valuation: Raymond James is the only firm covering Cost Plus, and it recommends holding shares. The company has a book value of $2.90 and a price-to-book ratio of 1.66, which is in line with the average of its general retailers peer group, according to Bloomberg. Cost Plus shares offer investors value on a price-to-sales basis, as the company's P/S ratio of 0.12 is well below the sector average of 1.40.

5. Callon Petroleum ( CPE) is an oil and gas exploration and production company based in Natchez, Miss. Shares traded close to $30 in 2008 before plunging below $1 in May 2009. Callon finished 2009 at $1.50.

Closing Price: $6.97 (June 16)

Total Return (YTD): 364.7%

Developments in 2010: In March, Callon posted a fourth-quarter profit of $2.27 a share, compared with a net loss of $21.19 a share in the year-ago quarter as revenue surged more than 350% to $70.9 million. In April, the company regained compliance with the New York Stock Exchange's listing requirements, and a month later Callon notched a first-quarter profit of 13 cents a share, which exceeded analysts' targets. Earlier this month, Callon said it has a second on-shore drilling rig in the Permian Basin of West Texas that is set to begin drilling operations on July 1. Callon also said the oil spill in the Gulf of Mexico "has not impacted any of Callon's offshore operations or production."

Valuation: Analysts have a mixed view on Callon Petroleum. The stock has two buy ratings, one hold and one sell from firms covering the stock. The most bullish stock price target is $6, which is below where Callon shares currently trade. With a forward price-to-earnings ratio of 13.47, Callon offers a discount to the average P/E ratio of other oil and gas producers, which is close to 30, according to Bloomberg. Callon also offers value on a price-to-sales ratio, although it is very expensive on a price-to-book ratio. With a book value of 32 cents per share, Callon's P/B ratio is over 20.

4. Dearborn Bancorp ( DEAR) is the bank holding for Fidelity Bank based in Dearborn, Mich. Like nearly every other financial stock, Dearborn fell hard in 2008, dropping from more than $8 per share to below $2. The stock languished below the $1 mark for the final three months of 2009, finishing the year at 47 cents.

Closing Price: $2.23 (June 16)

Total Return (YTD): 379.6%

Developments in 2010: Dearborn Bancorp started 2010 on the right foot after it reported fourth-quarter earnings of 55 cents a share, swinging from a year-ago loss of $3.77 a share. The results were sufficient to return the bank to an "adequately capitalized" category under regulatory guidelines for risk based capital, and Dearborn would go on to regain compliance with Nasdaq listing requirements in February. The bank in April revised its fourth-quarter profit to a loss of 76 cents a share, citing an additional $10 million provision for loan losses for the quarter. The stock would run higher again after Dearborn Bancorp said in late April that it swung to a first-quarter profit of 15 cents a share from a year-ago loss of 81 cents a share.

Valuation: The allowance for loan losses shrank in the first quarter from the previous quarter, which is a good sign for Dearborn. In addition, the provision for loan losses dropped to $100,000 in the first quarter of 2010 from $10.72 million in the year-ago quarter. However, nonperforming assets have increased the last three quarters to $138.49 million in the first quarter of 2010. The stock is also trading well below Dearborn's book value of $5.62 per share. As of May 28, nearly 19% of Dearborn's 6.48 million float was short, an indication that some traders are betting on a decline.

3. Radient Pharmaceuticals ( RPC) is an integrated pharmaceutical company, based in Tustin, Calif., focused on cancer and cancer testing. The stock failed to close above $1 after June 5, 2009, finishing the year at 24 cents.

Closing Price: $1.16 (June 16)

Total Return (YTD): 383.9%

Developments in 2010: In early April, Radient said it entered into an exclusive five-year collaboration agreement with Jaiva Technologies to conduct clinical trials for Radient's cancer therapy and vaccine technology in India. Radient said its monoclonal antibody test, which it began working on 20 years ago, "may change how people screen for early cancer detection." The stock jumped to a 52-week high of $2.59 before Radient announced a dilutive financing deal, which dropped shares back down to $1. In May, Radient announced a collaboration agreement with Provista Life Sciences for its Onko-Sure cancer test.

Valuation: Radient's news releases in April sparked a speculative trading frenzy, which came to a screeching halt when the company capitalized on the rapid increase in share price with the financing deal. The fear of another capital raising on another increase in share price will likely be on the minds of Radient investors. Looking at valuation, Radient offers value on a price-to-book (1.43) and a price-to-sales (2.96) basis, according to Bloomberg. That compares to the average of the pharmaceuticals and biotech sector (5.61 and 35.21, respectively).

2. Zanett ( ZANE) is a customized IT solutions provider based in New York. Shares traded above $260 on a split-adjusted basis in June 1996, but lost most of their value through 2009, when the stock finished at 40 cents.

Closing Price: $2.09 (June 16)

Total Return (YTD): 425.1%

Developments in 2010: Zanett's stock has been on a rollercoaster ride this year. On March 3, Zanett said it would likely receive a second delisting notice from the Nasdaq after it failed to meet the exchange's minimum bid price requirement. One day later, Zanett announced the closing of over $12 million in new business during the first two months of 2010, news that sent shares up tenfold from 30 cents. Zanett said in April that it had $17.1 million dollars in new business during the first quarter. In May, Zanett reported a first-quarter net loss of 4 cents a share, swinging from a year-ago profit of 4 cents a share, as revenue fell 2% to $10.7 million. Earlier this week, Zanett said it has signed orders worth $29.7 million in 2010, with a bulk of the revenue expected to be realized within the next 12 months.

Valuation: Zanett has a book value of only 72 cents per share, giving it a price-to-book ratio of 3.20. That's above the average P/B ratio of 2.38 of the software and computer services peer group. Based on estimates by an analyst at Virtua Research, Zanett has a forward price-to-earnings ratio for 2011 of 101. By comparison, the software and computer services peer group has a P/E ratio of only 10.16 for the current year, according to Bloomberg.

1. Sterling Banks ( STBK) is a bank holding company of Sterling Bank, based in Mount Laurel, N.J. Shares traded above $10 as recently as January 2007 before dropping sharply. The stock finished 2009 at a mere 44 cents.

Closing Price: $2.50 (June 16)

Total Return (YTD): 468.2%

Developments in 2010: The main catalyst for Sterling Banks' run higher is a merger agreement with Roma Financial ( ROMA), announced on March 18. Roma said it will acquire Sterling Banks for $2.52 per share for $14.7 million in cash. On June 10, Sterling shareholders approved the merger plan.

Valuation: Investors looking for an arbitrage play with little reward may be interested in the 2 cents per share they could pocket. There's little else that makes Sterling Banks a compelling buy for the rest of 2010, as the stock is essentially trading right now at the buyout price.

-- Written by Robert Holmes in Boston.

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