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Top 10 Stocks Under $5

Top 10 Stocks
Under $5

By Ian Wyatt, Chief Investment Strategist


Jason Cimpl, Research Analyst
Top 10 Stocks Under $5

Top 10 Stocks Under $5

Since stocks began their recovery rally in March, 2009, small cap mutual
funds have performed better than large cap funds. In fact, small cap funds
have turned twice the gains that large cap funds have. But this should have
been expected.

Because small cap stocks are the place to be when the stock market recovers.
As a group, small caps jump an average of 24% coming out of a recession.

But the top companies - the true cream of the small cap crop - routinely
jump hundreds, even thousands, of percentage points higher. And we’ve
seen that, too. Some small cap stocks have tripled and quadrupled.

Of course, at this stage of the rally, many small cap stock shave made some
pretty respectable gains. And there are good reasons for this. First of all,
small cap stocks suffered more than any other category of stocks when the
credit markets froze up and the global economy went into recession

You see, in general small companies don’t have as much cash in their
balance sheets as larger, more mature companies. That means they are more
dependent on financing to keep operations going. So when the credit
markets froze and financing was hard to come by, the risk was greatest for
small cap stocks.
Top 10 Stocks Under $5

And you could see this in the 51% decline for the Russell 2000 between
September 2007 and the market lows. Compared to the 47% decline for the
S&P 500, it’s clear that investors perceived that risk was greatest for small
cap stocks.

When Risk Becomes Opportunity

Of course, I started recommending high quality small cap stocks


SmallCapInvestor PRO advisory service members back in February. It was
clear that stimulus efforts and asset guarantees aimed at unfreezing the credit
markets would eventually do the trick. And small cap stocks are the place to
be when the economy starts to recover.

My strategy started paying off in March, when the perceived risk for small
cap stocks quickly turned to opportunity.

So far this year, SmallCapInvestor PRO has gone 16 for 22 with a 26%
average gain per recommendation.

But now, I see a unique opportunity to buy high-quality micro-cap stocks for
long-term holding and significant share price gains. Because even though
small cap stocks as a whole have made a strong recovery, some are still
trading at extremely low valuations.

The situation reminds me of 2002-2003. The Internet bubble had burst and
stocks had been decimated. But even as the markets recovered dramatically,
there were still phenomenal opportunities for select small cap stocks.

I led my readers to some amazing returns in those years. I’m talking about
real, life-changing gains like:

• 746% on J2 Global
• 705% on Bankrate
• 649% On Peyto Energy Trust
• 311% on FindWhat
• 444% on Lexar Media
• 203% on eSpeed
• 251% on iMergent
Top 10 Stocks Under $5
I’m convinced similar gains can be had, if you know where to look. And
right know, I’m looking at the smallest of the small caps – the microcaps.

Big Value in the Smallest Stocks

Microcap stocks are the smallest category of stocks. Market capitalization


for these companies runs only as high as $300 million. But if you know what
to look for, you can find tomorrow’s superstar stocks in this category. And
right now, you can also find phenomenal value.

I’m not sure if investors believe there is simply too much risk with some of
these small cap stocks or if they’ve simply been overlooking these stocks
and concentrating on more popular names. Whatever the case, their loss is
your gain.

In this Special Report, my goal is to bring you stocks that have huge gain
potential. Some of them will only double. Others will triple or quadruple.
And don’t be surprises to see one or two become 4-baggers over the years.

Happy Investing,

Ian Wyatt
Chief Investment Strategist
Wyatt Investment Research

PS – You’ll soon be receiving SmallCapInvestor Daily, my daily


investment letter. Every day in SmallCapInvestor Daily I dissect the news
and scour the financial markets to uncover the trends that are affecting your
wealth. We’ll discuss individual small-cap stocks, sector trends and the
latest economic data for the sole purpose of making money. I’m sure you’ll
enjoy it…
Top 10 Stocks Under $5
Amtech Systems Inc. (Nasdaq:ASYS)
Tempe, Arizona
52-Week Range: $2.25 - $7.24
Market Cap: $40 million
Stock Price: $5.06
Target: $6.75

Amtech Systems, Inc. makes the equipment that its customers use to manufacture
semiconductors. The company produces horizontal diffusion furnaces, small batch
vertical furnaces, and conveyor furnaces. The furnaces are then later used to manufacture
solar cells and semiconductors. The company also provides automation equipment for
silicon wafer production, including mass wafer transfer systems, sorters, elevators,
buffers and conveyers.

The market for diffusion furnace equipment manufacturers is still small, but Amtech
Systems is a big fish in a small pond. Currently, the company accounts for 40% of total
capacity. This market is highly specialized, but there are plenty of growth opportunities
both within the U.S. and abroad. This specialization makes diffusion furnace
manufacturers attractive buyout targets.

In August 2009, Amtech Systems reported solid third quarter results. Revenues were
negatively impacted by the recession, but the company was able to generate $12.5 million
in sales, up from $10.9 million in the prior quarter. Gross margins in Q3 2009 returned to
2008 Q3 levels of 29%, an increase from 22% in the second quarter of 2009.

The company continues to lose money, but its losses are getting smaller. The 2009 Q3
loss of $235,000 is significantly less than last quarter’s loss of $2.1 million. Additionally,
Amtech Systems has $30 million in orders sitting in backlog, and $40 million in cash.
The company’s outlook is positive. The solar industry continues to mature and decreasing
wafer prices are helping to make solar energy commercially viable.

American Vanguard Corporation (NYSE:AVD)


Newport Beach, California
52-Week Range: $7.36 - $15.85
Market Cap: $210 million
Stock Price: $7.72
Target: $12.50

American Vanguard makes specialty chemicals for a variety of agricultural and


commercial uses. Most of the company’s business is in the United States and its
chemicals include insecticides, fungicides, herbicides, and soil fumigants, both in liquid
and granular forms.
Top 10 Stocks Under $5
Rising demand for food, feed, fiber, and fuel continues to boost the need for specialty
chemicals. Despite this, the company has been hurt by falling prices. As a result,
revenues declined 1.8% to $66.4 million in the third quarter of 2009. Earnings have come
down to $2.1 million from $6 million one year ago.

Despite the recent decline in revenues and earnings, American Vanguard has a good
distribution network. The company’s manufacturing facilities are spread throughout the
entire United States. This advantage means they have low shipping costs.

Additionally, plants in Missouri and Idaho are in prime locations. The Missouri facility
is within 500 miles of 80% of the U.S. corn market. The Idaho plant is well positioned to
meet the demands of the Northwest and Canada. As long as the company keeps costs in
check, income expansion will come as prices for the company’s chemicals increase.

Dreams, Inc. (AMEX:DRJ)


Plantation, Florida
52-Week Range: $0.21 - $1.74
Market Cap: $49 million
Stock Price: $1.32
Target: $3

Dreams Inc distributes and sells sports licensed products, memorabilia, and display cases.
The company is vertically integrated and operates in three segments: retail,
manufacturing, and franchise. You can find their products in any one of 17 Field of
Dreams stores, 6 FansEdge stores, or 8 franchise stores. The company is also an e-
commerce retailer, selling through FansEdge.com and ProSportsMemorabilia.com.

In September, Dreams Inc entered into a licensing relationship with the National Baseball
Hall of Fame & Museum. Its proprietary e-commerce technology was a major factor in
the agreement; it now runs the online channel of the Hall of Fame’s fan shop. This
alliance is one more in a growing list of web syndications that includes Majestic Athletic,
AOL, USA Today, Sporting News, the Philadelphia Eagles, the Washington Wizards,
and JCPenney.

Dreams Inc is a rebound story. The company is emerging from a tough spell. For the
six-months ended June 30, 2009 total revenues decreased 16%, to $27.0 million, from
$32.2 million for the six months ended June 30, 2008. Net losses were $2.0 million, up
from $1.4 million in net losses for the same period last year.

The growth of this company will come from online retail which is a rapidly becoming its
primary source of revenue. Online sales were $6.7 million in Q2 2009 and represented
55% of sales, up from $6.0 million and 43% in Q2 2008. With total current assets of $54
million, and a market cap of $44 million, shares of Dreams look very cheap.
Top 10 Stocks Under $5
China TechFaith Wireless Communication Technology (Nasdaq:CNTF)
Beijing, China
52-Week Range: $2.94 - $3.11
Market Cap: $140 million
Stock Price: $3.28
Target: $4.75

China TechFaith designs mobile handsets, wireless software solutions, and handheld
applications. The company’s main focus is on developing and producing for the middle
and high-end markets.

In this ever changing and fast paced industry, China TechFaith has made the right choice
to focus on high-end products. While volume at this price point is less than at the low-end
of the market, margins are much stronger. On average, low-end phones sell at 10% gross
margin, while the high-end merchandise grabs 25% gross margin.

The company’s competitive advantage is achieved by focusing on bringing new products


to market. This is the right way to operate when choosing margin over volume. So far,
the company continues to thrive. Their most significant risk factor is that their markets
will no longer like their premium products.

However, China TechFaith’s growth is being driven by a diverse customer base. The
company has a customer in every continent but Australia. This customer foundation has
provided the company with a solid financial track record. Besides a minor slump in 2006,
the company has managed to grow sales at over 30% every year since 2004. Operating
expenses have been widely variable, so net income has not been consistent, but costs look
to be stabilizing into 2009. This should translate into more reliable margins.

In the second quarter of 2009, the company reported a slight growth in sales to $50
million from $48 million the previous quarter. Net income was $4.5 million or $0.10 per
share, up from $2.1 million or $0.05 per share the previous quarter. This result includes a
$2.1 million gain as a result of change in fair value of the derivatives associated with
convertible debt held by China TechFaith.

Richardson Electronics (Nasdaq:RELL)


Lafox, Illinois
52-Week Range: $5.62 - $5.88
Market Cap: $101 million
Stock Price: $5.67
Target: $8.25

Richardson Electronics distributes a variety of electronic components to the radio


frequency, wireless, and display systems markets. Technology in this field is constantly
changing and customers regularly need more reliable and cost-effective components for
their final goods.
Top 10 Stocks Under $5
Richardson Electronics works with clients to design circuits, test prototypes and
assemblies, and deliver the highest quality solutions to fit unique needs. The company is
continually improving an efficient supply-chain which begins with the most cost-
effective components, and ends with timely delivery of supplies.

On October 7th Richardson Electronics reported first quarter 2010 results. Results were
poorer than expected due to the recession, but the company managed their costs to
maintain margins. Sales for the first quarter were $109.5 million, down 21.2% from
$138.9 million during the first quarter of last year. Margins were 24.2%, slightly higher
than 23.5% last year. Net income during the first quarter was $1.9 million, or $0.11 per
diluted share, down from $3.7 million, or $0.20 per diluted share, last year.

This company will rebound as technology spending turns around. Revenues should
recover this year and the stock price will follow. Shares appear cheap at their current
price. The debt balance is a bit of a concern, but the company’s cash balance will provide
plenty of cushioning to fund operations.

Vicono Industries (AMEX:VII)


Hauppauge, NY
52-Week Range: $3.88 - $7.50
Market Cap: $30 million
Stock Price: $6.20
Target: $9.75

Vicon Industries manufactures video components used in surveillance and security


systems. It sells its products through dealers, distributors, and government entities
worldwide. End users include office buildings and commercial manufacturers that use
network video recorders for security surveillance. Prisons and banks also use the
company’s video systems to monitor properties and transportation departments use its
products for tunnel monitoring.

This wide customer base has helped stabilize Vicon Industries’ financial results. In the
last quarter, revenues were down slightly from the prior year, resulting in a similar
decrease in net income. Our focus is on the positive operating cash flows which totaled
$5.5 million year-to-date. Additionally, the company has been buying back shares this
year, which is a great sign. Shareholders will need to wait for revenue growth before
seeing significant stock appreciation. However, a $3.17 per share cash balance will
protect the current stock price.
Top 10 Stocks Under $5
Boots & Coots (AMEX:WEL)
Houston, Texas
52-Week Range: $0.92 - $1.86
Market Cap: $110 million
Stock Price: $1.36
Target: $2

Boots & Coots provides pressure control related services to onshore and offshore oil and
gas exploration companies. The company’s services include prevention and risk
management programs, inspection services, and engineering and firefighting pressure-
control equipment rental.

In September 2009, Boots & Coots acquired Halliburton’s external abrasive jet cutting
systems. The system was developed by Halliburton to help the firefighting crews in
Kuwait battle more than 700 fires. Once the deal closes, the jet cutting systems will be
strategically positioned in locations around the world.

In August, Boots & Coots reported second quarter 2009 results. For the six months ended
June 30, 2009, Boots & Coots reported revenues of $101.7 million, up from $96.9 million
for the same period in 2008. Net income was $2.7 million, or $0.03 per diluted share, in
2009, up from $11.2 million, or $0.14 per diluted share, for the prior year six month
period. The company’s ability to cut costs will be a major factor for net income and share
value going forward.

Tri-Valley (AMEX:TIV)
Bakersfield, California
52-Week Range: $0.83 - $4.97
Market Cap: $66 million
Stock Price: $2.42
Target: $3.75

Tri-Valley explores and develops petroleum, metal, and mineral properties. The
company’s main oil and gas properties include the Ekho property and the Sunrise-Mayel
Natural Gas projects in California. It also operates precious metals properties in Alaska.

Tri-Valley is currently reviewing proposals from several private equity firms who have
expressed interest in making significant equity investments in the company. These
proposed investments are intended to advance its Alaskan gold properties and its heavy
oil project at Oxnard, California.

The company might be a couple of years away from any real production, but with the
proper financing, it can last for years. Private money is interested so capital will not be an
issue. The company is counting on its Alaska property for a gold discovery.
Top 10 Stocks Under $5
Integrated Silicon Solution (Nasdaq:ISSI)
San Jose, California
52-Week Range: $1.31 - $3.85
Market Cap: $96 million
Stock Price: $3.80
Target: $5.50

Integrated Silicon Solution builds circuits for digital consumer electronics products. The
company’s products are used in cell phones, networking switches and routers, DSL
modems, LCD TVs, GPS systems and video equipment. It supplies products to
manufactures worldwide reaching Asia, the United States, and Europe.

Revenue in the fiscal year ended September 30, 2009 was $154.3 million, a decrease of
34.4% from $235.2 million in 2008. Gross margin increased in 2009 to 25.7% from
22.6% in 2008. The company is still not profitable, but the net loss for this year was only
$5.5 million, or $0.22 per share from a loss of $17 million or $0.60 per share. The
company also has $59 million waiting in cash equivalents.

The company looks to be in great shape going forward. Currently, shares trade at only 1.5
times the company’s cash balance. The stock price is a mere 0.6 times sales, which is
cheap. The company is not quite profitable, but given improving sales, look for positive
net income next year.

DryShips (Nasdaq:DRYS)
Athens, Greece
52-Week Range: $2.72 - $23.93
Market Cap: $1.6 billion
Stock Price: $6.14
Target: $9

DryShips’ fleet carries various drybulk commodities, including coal, iron ore, grains,
bauxite, phosphate, fertilizers and steel. As of August, 2009, the company owned and
operated a fleet of 41 drybulk carriers including seven Capesize, 29 Panamax, two
Supramax, and three newbuilding drybulk vessels. The company’s fleet has a combined
deadweight tonnage of approximately 3.6 million.

DryShips is one of the riskier shippers. The company has a load of debt, and although
they were able to restructure some of their debt payment, their lenders are keeping them
on a short leash. DryShips does not like to enter into fixed-contract prices. Thus, the
company is highly exposed to fluctuations in the dry bulk index. This stock is not for the
risk averse, but should the Baltic Dry Index rebound, shares of this shipper will rocket
higher.
Top 10 Stocks Under $5
The company reported an uninspiring third quarter. With falling commodity prices, sales
and net income were hurt this year. Revenue fell to $120 million from $239 million in 3Q
2008. Net income was down significantly from last year’s third quarter, but was still
positive at $36.7 million, or $0.12 per diluted share, from $4.13 per diluted share in 2008.
This is not a concern as long as commodity prices increase, which we think they will. The
stock will trade in the double digits very soon.

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