Financial professionals on the floor of the New York Stock Exchange WednesdayEMMANUEL DUNAND
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.
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.
On the other hand, TheStreet Ratings has a "sell" rating on DryShips, highlighting the disappointing historical performance in the stock itself and generally weak debt management. "Looking ahead, other than the push or pull of the broad market, we do not see anything in the company's numbers that may help reverse the decline experienced over the past 12 months," TheStreet Ratings wrote in a March 20 research report.
7. Abraxas Petroleum
Company Profile: Abraxas Petroleum is an independent energy company, developing and producing oil and gas in the U.S. from the Rock Mountain, Permian Basin and Gulf Coast regions.
Stock Performance This Year: 10 per cent
Analyst Consensus: Wall Street gives Abraxas strong marks, with seven analysts rating the stock a "buy," including those at Wunderlich Securities and R.W. Baird. Three other firms say investors should hold on to shares. No firm has a "sell" rating on Abraxas. The average price target of $6 implies 21 per cent upside potential.
Bullish Case: Canaccord Genuity analyst Derrick Whitfield on March 21 reiterated his firm's "buy" rating on Abraxas and increased his price target to $5.50 from $5, citing the company's transformation progress and growing exposure to an oil-weighted production base. "We continue to believe there is significant value embedded in the company's oil plays that will be unlocked this year through the successful execution of its first wells in the Bakken, Eagle Ford, Niobrara and Permian projects," Whitfield wrote in the research report.
TheStreet Ratings has a "hold" on the stock, saying Abraxas' strengths in revenue growth and earnings per share growth are countered by weak cash flow from operations. While the stock has more than doubled in the past year, TheStreet Ratings says investors can't assume past performance will drive future results. "Quite to the contrary, its sharp appreciation over the last year is one of the factors that should prompt investors to seek better opportunities elsewhere," the March 20 research report says.
6. Force Protection
Company Profile: Force Protection designs and manufactures blast- and ballistic-protected vehicles to the U.S. and foreign militaries. The company's specialty vehicles protect their occupants from landmines, hostile fire and improvised explosive devices (IEDs).
Stock Performance This Year: -11 per cent Analyst Consensus: Seven research firms, including Capstone Investments and Morgan Keegan, rate Force Protection a "buy." The only other firm covering the stock has a "hold" rating. The average price target of $6.90 implies a 41 per cent rise in shares from current levels.
Bullish Case: Imperial Capital analyst Jonathan Richton upgraded Force Protection to "buy" on March 11 after the company reported fourth-quarter results. Richton notes that while the company's management expects the first half of the year to be weak, he says asset value remains strong and that improved results on increased vehicle deliveries and modernization sales will benefit the company in the second half. With a valuation range of $5.50 to $6.50, Richton says the stock has about 23 per cent upside potential based on the midpoint.
TheStreet Ratings recommends that investors hold on to shares of Force Protection, as the company's largely solid financial position with reasonable debt levels are countered by "feeble growth in the company's earnings per share, deteriorating net income and disappointing return on equity."
5. Comverge
Company Profile: Comverge provides products and services to the electric power markets in North America, focusing on demand response and advanced metering systems.
Stock Performance This Year: -35 per cent
Analyst Consensus: Eight analysts have a "buy" rating on Comverge, including those at firms like R.W. Baird. However, 12 other firms recommend investors hold shares, including JPMorgan, Jefferies and Piper Jaffray. The average analyst price target of $7.92 represents potential upside of 85 per cent from current levels.
Bullish Case: Noble Financial analyst Matthew Crews reiterated a "buy" rating and $10 price target on Comverge in a March 10 research note, telling investors to look beyond the lull. "We remain positive on Comverge despite our lowered estimates," Crews wrote. "We believe that the industry is facing a lull in 2011 and we expect an improving environment in 2012 and beyond based on growing demand response under management and improving pricing on its demand response capacity."
On the other hand, TheStreet Ratings has a "sell" rating on Comverge due to weaknesses "such as its disappointing return on equity, generally disappointing historical performance in the stock itself and poor profit margins."
4. Gastar Exploration
Company Profile: Gastar Exploration is an independent energy company that engages in the exploration and production of natural gas and oil primarily in the U.S.
Stock Performance This Year: 8 per cent
Analyst Consensus: Eight researchers have a "buy" rating on Gastar shares, including analysts at SunTrust Robinson and MKM Partners. The other two analysts covering the stock say investors should hold shares. The average analyst price target of $6.06 implies potential upside of 33 per cent.
Bullish Case: KeyBanc Capital Markets analyst Gabriele Sorbara maintained a "buy" rating and increased the firm's price target to $5.75 earlier this month after Gastar released fourth-quarter operating results. "We expect Gastar shares to trade at a premium to peers, given the company's healthy balance sheet and growth potential," Sorbara wrote in the March 11 research report.
TheStreet Ratings has a "hold" rating on Gastar's stock, saying the company's largely solid financial position and no debt are big positives. However, the ratings model views the company's growth in earnings per share, return on equity and net income as disappointing.
3. Chimera Investment
Company Profile: Chimera Investment is a specialty finance company that invests in residential mortgage-backed securities (RMBS), residential mortgage loans and other real estate-related securities. The stock has been an attractive pick for speculators thanks to an enormous 13 per cent dividend yield.
Stock Performance This Year: 1 per cent
Analyst Consensus: Chimera ranks third of this list with nine "buy" ratings from research firms, including Jefferies, Keefe Bruyette and Woods, and Cantor Fitzgerald. The other three analysts following the company have a "hold" rating on the stock. The average price target of $4.53 represents potential upside of only 8.6 per cent, though.
Bullish Case: Bank of America/Merrill Lynch analyst Kenneth Bruce tempered his outlook on Chimera after the company lowered its first-quarter dividend payment by 3 cents. Still, Bruce maintains a "buy" rating and $4.25 price target on the stock, noting Chimera's relatively high returns on invested capital.
"Despite a modestly lower dividend of 56 cents annually, we believe CIM shares should continue to benefit from robust demand for yield in equity markets, given an implied 13 per cent to14 per cent dividend yield from the current share price," Bruce wrote in the March 22 research report.
TheStreet Ratings doesn't have a rating on Chimera Investment.
2. SatCon Technology
Company Profile: SatCon Technology provides utility-grade power-conversion services for commercial and renewable-energy installations and distributed energy markets.
Stock Performance This Year: -20 per cent Analyst Consensus: Eleven of 13 analysts covering SatCon Technology rate the stock a "buy," including those at Stifel Nicolaus, Raymond James and Piper Jaffray. The other two analysts are split between "hold" and "sell" ratings. The average price target of $5.77 represents potential upside of 64 per cent from current levels.
Bullish Case: Jefferies analyst Jesse Pichel has a "buy" rating and $6 price target on SatCon following the company's presentation at the firm's annual global clean technology conference. Pichel notes that the presentation was upbeat and that CEO Steve Rhoades and CFO Donald Peck answered tough questions in the wake of the stock's rapid selloff after the latest earnings release.
"Satcon is a solar-inverter supplier that is leveraged to the high-end inverter market, low-cost manufacturing base in China, and solar growth in North America and China," Pichel writes in the Feb. 24 research report. "We believe these factors will allow SATC to grow revenue/earnings significantly in 2011 and 2012."
TheStreet Ratings has a "hold" rating on SatCon, having upgraded it from "sell" in February. The model highlights SatCon's "poor" profit margins, while acknowledging strength in the company's revenue growth, price performance and "impressive" record of earnings per share growth.
1. Sprint Nextel
Company Profile: Sprint Nextel offers a range of wireless and wireline communications products and for individual consumers, businesses, government subscribers and resellers. The company has been touting its 4G wireless network, which it claims has faster data speeds and better reliability than those of rivals AT&T and Verizon.
Stock Performance This Year: 13 per cent
Analyst Consensus: Sprint tops the list of stocks under $5 with the most "buy" ratings, at 13. A larger number of analysts, though, say investors should merely hold on to the stock, no doubt due to the uncertainty created by AT&T's proposed $39-billion buyout of T-Mobile USA. While 16 analysts have a "hold" rating, another five say investors should dump shares of the troubled wireless company. The average analyst price target of $5.25 implies potential upside of 14 per cent from current levels.
Bullish Case: Credit Suisse analyst Jonathan Chaplin has an "outperform" rating and $8 price target on Sprint, making the telecom provider one of the firm's Focus List stocks. Chaplin notes that he believed Sprint would merge with T-Mobile USA before AT&T offered nearly $40-billion to acquire the business from Deutsche Telekom. While strategic possibilities have diminished, Chaplin says his thesis is unchanged.
"Sprint and T-Mobile compete for the postpaid value segment," Chaplin wrote in a March 20 research note. "Thus, consolidation should improve competitive dynamics for Sprint in the near term. Longer term, the entire industry could benefit from an improved industry structure."
On the other hand, TheStreet Ratings rates Sprint a "sell" as it will be more difficult for investors to achieve positive results compared to other stocks the model covers. "The company's weaknesses can be seen in multiple areas, such as its disappointing return on equity and generally weak debt management," a March 20 research report notes.