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Financial professionals on the floor of the New York Stock Exchange Wednesday (EMMANUEL DUNAND)
Financial professionals on the floor of the New York Stock Exchange Wednesday (EMMANUEL DUNAND)

TheStreet.com

Top 10 'buy'-rated U.S. stocks under $5 Add to ...

Citigroup is the favourite under $5 (U.S.) stock pick of Wall Street, but the global bank won't be selling that cheaply for long.

Citigroup recently announced plans for a 10-for-1 reverse stock split, which will propel the share price to nearly $50 by reducing the number of outstanding shares from 29 billion to 2.9 billion.

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Citigroup investors may like the move as the bank's stock now will look more attractive to fund managers, who typically can't invest in stocks trading under $5 due to restrictions in their fund's charter. However, they will lose one key benefit of stocks under $5, and that is trading volume. An average of more than 450 million shares of Citigroup change hands each day, creating plenty of liquidity in the stock. Citigroup has been the top under $5 stock pick of analysts, garnering 15 "buy" ratings from Wall Street firms.

Investors searching for high-volume stocks under $5 now must look elsewhere for big gains in the wake of Citigroup's reverse-split announcement. Many of these low-priced stocks have proven to be winners, including, Evergreen Energy and Majesco Entertainment , which have more than tripled this year.

Stocks trading under $5 typically have no analysts' coverage - never mind a "buy" rating - leaving investors to do the homework for themselves. However, a select few boast favourable coverage from analysts, which can direct share-price movements. Excluding Citigroup, the following 10 U.S. stocks trade at less than $5 and have gotten the most "buy" ratings from analysts.

10. Paetec Holding

Company Profile: Paetec Holding provides data and voice communication services to enterprises and other telecom carriers. The company recently acquired Cavalier Telecom, which has added to sales, but Paetec is still struggling to recover from the recession.

Stock Performance This Year: -13 per cent

Analyst Consensus: Of the 13 analysts following Paetec, seven have a "buy" rating on the stock and the other six say investors should hold shares. The average price target of $5.46 represents 66 per cent upside potential.

Bullish Case: D.A. Davidson analyst Donna Jaegers upgraded Paetec to "buy" on March 10, arguing that if Paetec gains traction on sales of higher bandwidth services in the Northeast, revenue estimates are probably too conservative. "Also, a faster-than-expected economic rebound could also increase revenues," Jaegers wrote, adding that the stock offers 27 per cent price upside based on the firm's target of $4.50.

Meanwhile, TheStreet Ratings has a "sell" rating on the communications company, noting that the stock has considerably underperformed the S&P 500 and the diversified-telecom-services industry. "The company's weaknesses can be seen in multiple areas, such as its deteriorating net income, weak operating cash flow, generally disappointing historical performance in the stock itself and feeble growth in its earnings per share," TheStreet Ratings wrote in a March 20 report.

9. Corcept Therapeutics

Company Profile: Corcept Therapeutics is a biopharmaceutical company developing Corlux, a synthetic steroid to treat Cushing's syndrome.

Stock Performance This Year: 9 per cent

Analyst Consensus: Seven Wall Street firms rate Corcept a "buy," including Stifel Nicolaus and Piper Jaffray. Only one analyst says investors should dump shares. The average price target of $6.60 implies potential upside of 56 per cent.

Bullish Case: McNicoll Lewis Vlak analyst Christopher James initiated coverage of Corcept on March 10 with a "buy" rating and $8.50 price target. "Given the interviews conducted with both endocrinologists and practicing neurosurgeons, we feel uniquely positioned in the understanding of Cushing's syndrome, and the approvability and potential market size for Corlux," James wrote in his research note, adding that he has a high level of confidence that Corlux will be approved in early 2012.

TheStreet Ratings doesn't have a rating on Corcept Therapeutics.

8. DryShips

Company Profile: DryShips, based in Greece, is a dry-bulk transportation company. DryShips also owns ultra-deep-water drillships and oil-tanker vessels.

Stock Performance This Year: -9 per cent

Analyst Consensus: DryShips garners seven "buy" ratings from Wall Street analysts, including those at Lazard Capital Markets and Pareto Securities. A larger number, though, say investors are better off holding on to shares. Those nine firms include Jefferies and Dahlman Rose. Two other analysts have a "sell" rating on DryShips.

Bullish Case: In January, Cantor Fitzgerald analyst Natasha Boyden maintained a "buy" rating and $7 price target for DryShips, arguing that the company's diversification into the ultra-deep-water-drilling sector is a positive development and could lead to a spin-off of the segment. "Furthermore, with all of its dry-bulk fleet fixed under period charter contracts, we suggest the primary upside catalyst for the stock over the near term will be securing additional employment and financing for the remaining drilling rigs," Boyden wrote in the research report.

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