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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