Stocks Under $10 Weekly Summary
U.S. stocks started the final month of 2014 with modest gains across the broader market averages. We digested a lot of positive economic reports this week, which were punctuated by the November jobs data on Friday. Next week will be relatively light on the economic front, with the highlights being Thursday’s advanced retail sales report and Friday’s reading on producer prices.
As we approach the end of the year, we’re keeping an eye toward 2015. We took profits and sold 150 shares of ON Semiconductor (ONNN) on Friday. With about 13% of the model portfolio in cash, we have the room to add another name or two as we gauge which low-dollar names could be big winners in the new year.
As a reminder:
-- A Game Breaker is going to change the landscape of an industry, as Intel (INTC) , Microsoft (MSFT) and Wal-Mart (WMT) did in their respective sectors. Investors can make big money in these stocks by getting in before the crowd.
-- Inflection-Point stocks have a broken business model that's on the mend but have yet to be recognized by the market. Investors who recognize a turnaround early can pocket strong returns.
-- Stealth Stocks are often names unknown to the general public but can be hugely profitable investments -- especially when they have catalysts to boost their share prices.
Also, Ones are stocks that we would buy at their current quotes, Twos are stocks that we would buy on a pullback and Threes are names that we would sell into strength.
ONES
Active Power (ACPW:Nasdaq; $1.84; 3,050 shares; 3.45% of the model portfolio; Game Breaker; $4.75 price target): Active Power's flywheel energy technology keeps its customers' mission-critical processes up and running. Its hardware uses half as much space as existing technologies do, but it generates twice as much power. The stock moved fractionally lower this week, despite another round of insider buying. According to Securities and Exchange Commission (SEC) filings, four insiders bought shares on the open market, including the company’s chief financial and chief executive officers. We assert that management can get Active Power back on the path toward profitability in the coming quarters.
Atmel (ATML:Nasdaq; $8.23; 1,000 shares; 5.06%, Inflection Point; $10 price target): The company makes microcontrollers that are used in electronics. The shares added nearly 4% to recent gains this week. We believe that management can continue to expand margins in the coming quarters.
Ballantyne Strong (BTN:Amex; $3.99; 2,500 shares; 6.13%; Stealth Stock; $6.25 price target): The company distributes digital movie projectors and manufactures screens and lighting equipment for theaters. It was a quiet week for the stock, which moved fractionally lower. We continue to believe that the stock deserves to trade at a discount to tangible book value of $4.45 a share.
Builders FirstSource (BLDR:Nasdaq; $6.65; 1,400 shares; 5.72%; Inflection Point; $10.50 price target): The company distributes materials to homebuilders in the southern U.S. The shares gained more than 7% this week on little news. We believe that Builders FirstSource can continue to expand margins and gain market share in the coming quarters.
Cott (COT:NYSE; $6.65; 1,200 shares; 4.91%; Stealth Stock; $10 price target): Cott produces and distributes soft drinks, noncarbonated beverages and bottled water, primarily focusing on private-label items for major retailers. The stock moved fractionally higher this week, as management sold $625 million of bonds to fund the acquisition of DSS Group. We continue to for the company for its solid 3.6% dividend yield.
Extreme Networks (EXTR:Nasdaq; $3.69; 1,700 shares; 3.86%; Inflection Point; $8.75 price target): The company makes Ethernet switches and recently doubled its size with the acquisition of Enterasys Networks. It was a quiet week for the shares, which gained fractionally. We continue to believe that management can improve productivity in the coming quarters.
McDermott (MDR:NYSE; $3.34; 1,525 shares; 3.13%; Inflection Point; $11.50 price target): This engineering-and-construction firm focuses on building and designing offshore oil and natural gas facilities. The stock fell 6% this week, along with the broader energy sector. We believe management can continue to turn the business around in the coming quarters.
Pacific Sunwear (PSUN:Nasdaq; $1.89; 3,800 shares; 4.41%; Inflection Point; $4 price target): This specialty retailer operates more than 500 stores in the U.S., selling surf- and skating-style apparel to teens and young adults. The shares rebounded 11% this week, as management announced better-than-expected quarterly results on Wednesday. The company continues to attract customers with its exclusive and private-label brands, and we believe the stock has 20% to 30% upside potential in the coming months.
SandRidge Energy (SD:NYSE; $2.42; 2,275 shares; 3.38%; Inflection Point; $8 price target): The company explores for natural gas and oil in the U.S., primarily onshore. The stock fell 14% this week, as underlying oil prices remained weak. Even so, we have already bought some shares around these levels, given its price hedging and manageable debt load.
Sonus Networks (SONS:Nasdaq; $3.71; 1,375 shares; 3.14%; Inflection Point; $5.25 price target): The company makes communications equipment, including session border controllers and diameter signal controllers. It was a quiet week for the shares, which finished little changed. We believe that new products can continue to drive growth in the coming quarters.
Standard Pacific (SPF:NYSE; $7.16; 750 shares; 3.30%; Inflection Point; $11 price target): This homebuilder generates the majority of its revenue in California. The stock fell 5% this week on little news. That said, the company has strong pricing power and should benefit from accelerating domestic economic growth.
Synovus Financial (SNV:NYSE; $26.49; 264 shares; 4.30%; Inflection Point; $33.25 price target): This Georgia-based bank operates branches throughout the Southeast. The shares added more than 2% to recent gains this week. We believe the company can continue to deliver above-average growth in the coming quarters.
TherapeuticsMD (TXMD:NYSE; $3.91; 2,225 shares; 5.35%; Game Breaker; $9.50 price target): The company develops hormone-replacement medicines for women. It was a quiet week for the stock, which moved 2% higher. We contend that TherapeuticsMD has an attractive clinical pipeline with several potential catalysts.
Yamana Gold (AUY:NYSE; $3.93; 1,350 shares; 3.26%; Inflection Point; $12.50 price target): This gold-and-copper exploration company operates seven mines and several ongoing development projects in Brazil, Argentina and Chile. The shares bounced back more than 4% this week, along with the underlying price of gold. Management is cutting costs and we believe the stock can move back up toward the mid-single digits in the coming months.
TWOS
Huntington Bancshares (HBAN:Nasdaq; $10.43; 600 shares; 3.85%; Inflection Point; $11 price target): This Ohio-based bank operates more than 600 branches across six states. The stock bounced back 3% this week. Even though the stock is trading at six-year highs, we remain convinced that it can continue to take market share from its larger competitors in the coming quarters.
Kodiak Oil and Gas (KOG:NYSE; $6.56; 700 shares; 2.82%; Inflection Point; $17 price target): The company explores for oil and gas in the Williston Basin and the Green River Basin. The shares dropped 9% this week, along with the broader energy sector. That said, investors of both Kodiak and Whiting Petroleum (WLL) approved the pending acquisition this week. We believe the deal makes both strategic and financial sense in this new energy pricing environment.
Martha Stewart Living Omnimedia (MSO:NYSE; $4.20; 1,350 shares; 3.49%; Inflection Point; $5.75 price target): The company operates in the home-goods segment, publishing magazines, producing broadcasts and licensing products to retailers. The stock pulled back fractionally this week. We believe that management can continue to unlock value from the company’s core brands in the coming quarters.
ON Semiconductor (ONNN:Nasdaq; $10.22; 650 shares; 4.08%; Stealth Stock; $11 price target): The company makes analog, standard logic and discrete semiconductors for use in data and power management. We sold 150 shares on Friday, as the stock added 13% to recent gains this week. Earlier in the week, management pledged to return 80% of ON Semiconductor’s future free cash flow, including repurchasing up to $1 billion worth of stock over the next four years. While we like what management is doing, we don’t want to be greedy with our gains, as the shares are up 48% from where we last bought them less than two months ago.
Unilife (UNIS:Nasdaq; $3.07; 2,350 shares; 4.43%; Game Beaker; $6.50 price target): This manufacturer of retractable and prefilled syringes offers products with convenience, safety and comfort advantages. It was a volatile week for the stock, which ended Friday fractionally lower. That said, the company announced a new 10-year commercial supply agreement on Tuesday for an ocular injection systems. Few details were available, but we know the medicine has already been approved in the U.S. and Europe. Unilife will receive an upfront fee and customization payments, but it will likely take between 12 and 24 months to develop and receive regulatory approval for a combination product. As the company continues to ramp its commercial production for various customers in the coming quarter, we believe that the shares can trade back up toward the mid-single digits.
Vantage Drilling (VTG:Amex; $0.71; 8,000 shares; 3.47%; Inflection Point; $2.25 price target): This offshore driller contracts its rigs for the exploration of oil and natural gas. The shares dropped 9% this week, along with the broader energy sector. That said, the company’s fleet is booked through 2015 and we believe the stock is oversold at current levels.
Zix (ZIXI:Nasdaq; $3.24; 2,250 shares; 4.48%; Stealth Stock; $5.75 price target): The company is a leading producer of email-encryption software that enables doctors to automatically send information to pharmacies. The stock moved more than 2% higher this week, as Zix announced a new customer contract on Wednesday. The company is carrying a lot of operating momentum into the new year and we believe that the shares can move back above $4 in the coming months.
THREES
Depomed (DEPO:Nasdaq; $16.04; 150 shares; 1.48%; Game Breaker; $15.75 price target): The company markets specialty drugs around its oral drug-delivery system, Acuform, which are used to treat some symptoms of Type 2 diabetes as well as post-shingles pain. The shares added nearly 4% to recent gains this week. We believe that management can continue to leverage the Acuform brand in the coming quarters.
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