Top Stocks Under $5 Beating the Market

BOSTON (TheStreet) -- Stocks under $5, such as Capital Trust (CT) and Majesco Entertainment (COOL), have more than doubled this year, easily beating the broader market much to the surprise of investors who have never heard of these penny-stock companies.

Small-cap stocks have been the big winners during the two-year bull market that followed one of the worst global recessions. Even though money managers argue that now is a time for investors to get defensive and move into less-risky asset classes like large-cap equities, small-cap stocks continue to lead the way.

The Russell 2000 index -- a benchmark for small-cap stock performance -- is up 6.8% so far in 2011, slightly below a gain of 7.7% the Dow Jones Industrial Average. However, the Russell 2000 is outpacing both the S&P 500 and Nasdaq Composite this year.

Analysts expect stocks under $5, like Sprint Nextel ( S), to outperform this year, but those companies haven't been among the biggest winners. Penny stocks including Evergreen Energy ( EEE) have tripled over the first five months of the year.

Investors in penny stocks must be prepared to lose it all. The risk of a sharp, quick selloff is elevated for investors in these companies. For example, trucking giant YRC Worldwide ( YRCW) has tanked recently, falling more than 50% this month alone.

Still, many inexpensive stocks have generated huge returns for lucky stock pickers. The following pages detail the best-performing stocks under $5 this year on the New York Stock Exchange, Nasdaq and NYSE Amex, ranked by total return through the first five months of 2011.


10. Level 3 Communications ( LVLT)

Company Profile: Level 3 Communications is an integrated Internet networking services provider. In April, the company said it would acquire fellow communications services company Global Crossing ( GLBC) for $2 billion.

Shares of Level 3 have steadily increased this year, with a big rise last week on news the company was able to lower its borrowing costs through a $600 million bond sale. Earlier in the month, Level 3 reported an adjusted first-quarter loss that beat analysts' forecasts.

Current Share Price: $2.30 (May 27)

2011 Total Return: 126%

Analyst Ratings: Level 3 is one of the most widely followed stocks on this list, garnering 12 overall ratings from analysts. D.A. Davidson is one of only two firms with "buy" ratings on the stock. Another seven firms, including Oppenheimer, suggest investors hold on to shares, while three firms rate the stock a "sell."

TheStreet Ratings has a "sell" rating on the stock, which it has maintained for two years. The latest report says Level 3's "primary weakness has been its feeble growth in its earnings per share."

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9. TeamStaff ( TSTF)

Company Profile: TeamStaff provides staffing services to the U.S. Department of Veterans Affairs and other U.S. governmental entities.

Once on the Nasdaq's chopping block for falling out of compliance with listing requirements, TeamStaff has seen its stock rebound sharply this month after the company said its first-quarter net loss shrank substantially from a year earlier. The company also announced that it was awarded the Department of Veterans Affairs' Consolidated Mail Outpatient Pharmacy program. Work is expected to begin on July 1 and continue for up to five years, the company said.

Current Share Price: $1.18 (May 27)

2011 Total Return: 131%

Analyst Ratings: There are currently no research analysts covering TeamStaff.

TheStreet Ratings has a "sell" rating on the stock, which it has maintained for two years. The latest report highlights TeamStaff's multiple weaknesses, "such as its disappointing return on equity, poor profit margins and weak operating cash flow."


8. Interphase ( INPH)

Company Profile: Interphase is a telecom-equipment maker. The company provides services for LTE and WiMAX, interworking gateways, packet processing, network connectivity, and security for key applications for the communications and enterprise markets.

Interphase shares more than doubled on Feb. 11, a day after the company reported fourth-quarter financial results. The company said revenue in the quarter jumped 24% to $5.8 million as it swung to a quarterly profit. The stock hit a high of $7.59 in March but has been steadily pulling back since.

Current Share Price: $4.22 (May 27)

2011 Total Return: 134%

Analyst Ratings: There are no research firms covering Interphase currently.

TheStreet Ratings has a "sell" rating on the stock, which it has maintained since downgrading the stock from "hold" in July 2009. The latest report calls attention to Interphase's "feeble growth in its earnings per share."

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7. Star Scientific ( CIGX)

Company Profile: Star Scientific develops dissolvable smokeless tobacco products, which are billed as delivering fewer carcinogenic toxins.

Shares of Star Scientific began surging in March on reports that compound RCP-006, which the company says is a "nutritional supplement," has potential in treating Alzheimer's. TheStreet's Adam Feuerstein notes that RCP-006, also known as anatabine, "might one day be a cure for Alzheimer's, but it's very premature to make such a claim since this nutritional supplement (not even a drug) has not yet been tested in humans, let alone humans with Alzheimer's."

That skepticism hasn't kept shares from rising. The stock did take a hit in April before the Food and Drug Administration said it will regulate smokeless electronic cigarettes as it does with traditional tobacco products. Shares are now near their all-time high.

Current Share Price: $4.73 (May 27)

2011 Total Return: 142%

Analyst Ratings: No research analyst currently follows Star Scientific. TheStreet Ratings does not have a rating on the stock.


6. USA Technologies ( USAT)

Company Profile: USA Technologies is a supplier of cashless, remote-management, reporting and energy-management services.

Shares of USA Technologies ramped higher in January after the company said revenue in its fiscal second quarter jumped 60% from a year earlier to $6 million, while its net loss narrowed to a penny a share from a loss of 19 cents. Shares pulled back slightly in March after USA Technologies announced it raised nearly $11 million in a private placement of common stock. In April, USA Technologies announced a collaboration with Verizon Wireless for connectivity that enables wireless point-of-sale payments at vending machines via credit and debit cards.

Current Share Price: $2.50 (May 27)

2011 Total Return: 142%

Analyst Ratings: Northland Securities has an "outperform" rating and $3 price target on USA Technologies. The only other research firm covering the company, Janney Montgomery Scott, rates the stock "neutral" with a price target of $1.25.

TheStreet Ratings has a "sell" recommendation on USA Technologies, citing "unimpressive growth in net income and poor profit margins."

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5. Authentidate Holding ( ADAT)

Company Profile: Authentidate provides software applications and Web-based services for businesses.

The surge in Authentidate's stock started in early April after the company completed the sale of its wholly owned subsidiary, Authentidate International AG, to Switzerland's Exceet Group AG. The transaction yielded net cash proceeds of $1.3 million. During the second half of April, the Department of Veteran Affairs, Ameri-Quipt and Superior Oxygen & Medical Equipment selected Authentidate's services.

Current Share Price: $1.12 (May 27)

2011 Total Return: 151%

Analyst Ratings: C.K. Cooper & Co. is the lone firm with research coverage on Authentidate, rating the stock "buy" with a $2 price target.

TheStreet Ratings has a "sell" rating on the stock, which it has maintained for two years. The latest report on Authentidate highlights the company's "deteriorating net income, disappointing return on equity and feeble growth in its earnings per share."


4. Dynatronics ( DYNT)

Company Profile: Dynatronics makes medicine and aesthetic products used by physical therapists, chiropractors, sports-medicine practitioners, podiatrists and physicians.

In March, Dynatronics announced that it signed a contract with FirstChoice Cooperative, the third group-purchasing-organization contract the company signed in two months. In April, the company regained compliance with the Nasdaq's listing requirements, as the stock climbed above $1 a share to satisfy the minimum bid price requirement.

Current Share Price: $1.60 (May 27)

2011 Total Return: 154%

Analyst Ratings: No research firm currently follows Dynatronics.

TheStreet Ratings has a "hold" rating on the stock after upgrading from "sell" on Sept. 30, 2009. The latest report notes the company's "revenue growth, solid stock price performance and largely solid financial position with reasonable debt levels by most measures." However, those strengths are countered by disappointing return on equity.

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3. Evergreen Energy ( EEE)

Company Profile: Evergreen Energy is a so-called cleaner-coal company.

On Jan. 5, Evergreen was granted an extension by the NYSE Arca to regain compliance with listing rules regarding minimum bid price and market value of publicly traded shares. By March 3, Evergreen regained compliance with the listing standards.

The stock hit a 52-week high shortly after the company completed a $16 million private placement of common stock. Shares pulled back, though, after Evergreen posted financial results for 2010. Revenue for the year fell to $403,000 from $423,000 in 2009.

Current Share Price: $1.88 (May 27)

2011 Total Return: 189%

Analyst Ratings: No research firm has coverage of Evergreen Energy. In addition, TheStreet Ratings doesn't follow the stock.


2. Capital Trust ( CT)

Company Profile: Capital Trust is a finance- and investment-management company that specializes in credit-sensitive structured financial products. The company is focused on the commercial real estate industry.

The stock spiked in April after Capital Trust announced a debt restructuring deal, which was financed by a new $83 million mezzanine loan provided by an affiliate of Five Mile Capital Partners.

Current Share Price: $4.72 (May 27)

2011 Total Return: 204%

Analyst Ratings: There are no analysts following Capital Trust.

TheStreet Ratings has a "sell" rating on the stock, which it has maintained for two years. The latest report highlights Capital Trust's "feeble growth in its earnings per share, deteriorating net income and weak operating cash flow."

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1. Majesco Entertainment ( COOL)

Company Profile: Majesco Entertainment makes video games mainly for the family-oriented, mass-market consumer.

Majesco's incredible run this year started on Jan. 11 when the company announced it had shipped more than 500,000 copies of its Zumba Fitness video game title for the Wii, Xbox 360 and PlayStation 3. In late January, the company announced that it regained compliance with the Nasdaq's minimum bid price requirement for continued listing.

In early March, shares of Majesco climbed higher after the company posted better-than-expected fiscal first-quarter financial results, with revenue jumping to $48.5 million from $29.2 million in the same period a year earlier.

Current Share Price: $2.95 (May 27)

2011 Total Return: 283%

Analyst Ratings: Majesco garners a lone "buy" rating from Needham & Co. and a "neutral" rating from Wedbush. Needham analysts have a $4 price target on the stock while Wedbush has a $3.50 target.

TheStreet Ratings has a "hold" recommendation on Majesco Entertainment. The research report says revenue growth, a largely solid financial position with reasonable debt levels and solid stock price performance are strengths that are countered by the company's weak cash flow from its operations.

>>To see these stocks in action, visit the Top Stocks Under $5 Beating the Market portfolio on Stockpickr.

-- Written by Robert Holmes in Boston.

>To contact the writer of this article, click here: Robert Holmes.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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