2 Under-$5 Stocks Crying for a Buyout

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( TheStreet) -- By and large, the world of sub-$5.00 stocks exists for suckers. Sure, you'll pull some winners out of the pile, but low-priced stocks are not all that different than out-of-the-money options. You can equate their "cheapness" with your low odds of having success trading and investing in them.

It's not that the low price of these equities causes your bad odds; rather, it should make you think about why they are so darn "cheap" to begin with. They're not inexpensive, they're flat out cheap.

With options, calls and puts get cheaper the farther out-of-the-money you go because as you drift away from the strike price, the odds decrease that your contract will go in-the-money leading up to or at expiration. Deep ITM calls and puts cost more the farther ITM you go for the inverse reason.

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With stocks, it's a different ballgame. Most represent sucker bets for reasons not associated with the trade itself. Stocks often get cheap because there's something wrong with the share structure, the company or both.

While not in sub-$5 territory just yet, Research in Motion ( RIMM) provides a good example.

Throughout 2011, I advocated buying puts on RIMM. On the ride down, bulls and "value" investors continued to tell me that the time to be bearish on RIMM was over. They pointed to the price-to-earnings ratio, book value, RIM's patents and other data they could feed into quantitative formulas.

What they failed to realize is that, for a considerable period of time (and maybe forever), the market does not value stocks on the basis of those factors, no matter what your MBA textbook tells you. It values them based on present reality and future potential. At RIM, both timeframes have been and continue to be in utter shambles.

In this article, I discuss two stocks that trade where RIMM could very well be headed -- below $5. I elaborate on the prospects of, and need for, a takeover in each case.

Nokia (NOK)

I am actually long this stock. Clearly, it's a speculative position. I am in it for two reasons. The secondary reason -- NOK has a Microsoft ( MSFT) takeover written all over it. Because I rarely buy stocks solely on the basis of M&A hopes, I have a primary reason that supports the position.

Even if the two companies do not make the marriage official, Nokia's decision to dump its Symbian platform in favor of Windows could not have come at a better time. Not only does it come as the company sets up to complete its fall from grace, but it comes when: a) competitor RIM cannot figure out what to do or who to partner with to salvage third place behind Apple ( AAPL) and Android and b) Microsoft nudged itself from its blue-chip slumber and appears ready to reign somewhat supreme again.

The best thing that could happen to Nokia is for Nokia to cease being Nokia (do you follow me?) and become Windows Phone. Just as it appears consumers are ready to get cozy with Windows 8, they're more likely to take to Nokia phones if they not only run Windows 8, but take on the name everybody knows and simply cannot ignore.

Sirius XM (SIRI)

I am not long SIRI and I doubt I ever will be. I will be the first to admit that I do not know the ins and outs of how Liberty Media ( LMCA) could take majority or full control of the satellite radio company. What I do know -- and have full confidence in -- is that if you care about the long-term viability of Sirius XM, you should hope and pray that Liberty ends up in charge.

A whole host of satellite radio ardents and penny stock speculators took a flyer on SIRI when it traded for pennies and dimes. In many cases, these folks won big; some even became wealthy or rich. There are two groups of SIRI shareholders you do not see mentioned often when the perma-bulls troll the Internet singing SIRI's graces:
  • The bagholder who bought the stock at some point prior to its implosion;
  • The shareholder who bought in somewhere around $2.00, expecting another 1,900% worth of price appreciation.
  • That's where much of the SIRI pumping comes from: Investors with absurdly high costs bases and shareholders who want to live the dream already realized by SIRI penny stock pioneers. These investors do not realize that, as long as Mel Karmazin remains Sirius XM's CEO, in his current persona, the stock has zero chance of moving much higher than it is right now, let alone sustaining any meaningful upside.

    And it's not just because SIRI counts roughly 3.75 billion outstanding shares. That's a drag, no doubt. Karmazin's answer, of course, is to buy back to shares. And that's the core problem. In an interview with Jim Cramer on Mad Money, the CEO has very little to say about doing anything dynamic to truly power revenue higher going forward:
    MEL KARMAZIN: OK. But the fact is that when you have all of this free cash flow you could make -- you use the free cash flow for an acquisition. There is nothing else.

    JIM CRAMER: There's nothing.

    MEL KARMAZIN: There is nothing, zero, out there that I want. OK. So you're not going to make an acquisition. You could return the capital to shareholders. At the end of this year, at the end of this year, we'll have between a $1.2 billion and a $1.5 billion of cash on our balance sheet. I don't know what to do with it other than to use it as you're characterizing.

    Call me crazy, but I think Amazon.com ( AMZN) CEO Jeff Bezos and others would beg to differ with what amounts to a lack of vision.

    Sirius XM runs in an ultra-competitive space where lines have become blurred. If you consider Sirius XM a satellite radio company, you're taking a rather myopic view. You need to see Sirius XM as part of the broader audio entertainment and new media sectors. These areas run the gamut from powerhouses like Apple and Amazon to upstarts such as Pandora ( P) to terrestrial radio companies. Massive reinvestment to evolve, seize opportunity and fuel hyper-growth -- that's the name of the game.

    Instead of embracing the attitude of a perpetual start-up, Karmazin runs Sirius XM like a traditional radio company. And that's not a big surprise. Mel is a terrestrial radio guy. And Sirius XM, the product, sounds a lot like AM Radio in its waning years. If Liberty Media gets to call the shots, I have faith it will shift Sirius XM's culture and fully integrate the property -- in synergistic, multiplatform fashion -- with its existing assets and future acquisitions.

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