Lots of investors love low-priced stocks. This seems weird, because stock price alone tells you nothing about the merits of an investment.
Yet, there is something to this, for two reasons.
1. Stocks priced under $10 can make big percentage moves in short order. Limited liquidity means relatively small orders push them around more than giants such as Microsoft MSFT, +0.24% or Facebook FB, +1.02% This is great for thrill seekers. And maybe even for profits.
A word of warning, though. If you turn to the stock market for thrills, you should put all your money in CDs. As market expert Martin Pring once pointed out, the stock market is designed to exploit your character flaws to take your money. The lust for thrills qualifies as a trait the market will gladly use against you. But I’m not your nanny. If you like small-cap stocks for the thrills, at least consider the five companies below because they come well-recommended.
2. With the decline of sell-side analysis, small-caps are poorly covered. You’re more likely to find an information advantage than at the big companies in the S&P 500 SPX, +0.29% or Dow Jones Industrial Average DJIA, +0.07%
This is why I regularly run an under-$10 stocks section in my stock newsletter, Brush Up on Stocks, where I let significant insider buying point me to a short list of undiscovered names in small-cap land to research.
Good fishing
Investors love initial public offerings and large-cap companies so much right now, this is a great time to find undiscovered small-caps.
“The attention is on Beyond Meat BYND, -3.09% trading at 70 times revenue, FANGs and all the mega-cap stocks,” says Michael Corbett, the chief investment officer at Perritt Capital Management, which specializes in small-cap and microcap value investing.
“Microcap stories are being ignored. Why would you bother looking at these small companies if you could own McDonald’s MCD, -0.03% which has nearly doubled in the past three years,” says Corbett.
This dynamic can quickly change — and benefit small-cap names. “I have been here before. I remember it from the late ’90s. This is very similar,” says Corbett. Back then, small-cap names flourished once the fascination with large-cap tech wore off. Even if this switch doesn’t play out soon, the following companies should do well because of important catalysts ahead.
DHX Media: For the love of ‘Peanuts’
As the owner of popular content like “Peanuts,” “Teletubbies,” “Strawberry Shortcake” and “Inspector Gadget,” DHX Media DHXM, +1.40% has the world’s largest independent library of children’s content. It’s busy producing more in studios in Vancouver. To oversee these efforts, DHX recently hired Amir Nasrabadi, who has developed content at Disney DIS, +0.89% and Paramount, a division of Viacom VIAB, -0.15% DHX also has a popular YouTube channel for children called WildBrain, where viewership grew 15% in the first quarter.
Corbett, at Perritt Capital Management, sees two catalysts on the horizon.
First, as Netflix NFLX, +0.46% Amazon.com AMZN, +0.16% Apple AAPL, +0.31% and Disney battle it out with traditional cable companies for eyeballs, DHX’s content will be in demand. “All the economics improve dramatically in the future,” says Corbett.
DHX recently signed distribution deals with Disney, the BBC, AT&T’s T, +0.69% Turner Broadcasting and Discovery DISCA, +0.20% among others. DHX has paired up with Comcast CMCSA, +0.24% to debut its new subscription-based streaming service called Kids Room on the Xfinity X1 platform this summer.
Next, Corbett thinks relatives of deceased “Peanuts” creator Charles M. Schulz are going to become more amenable to creating more content based on this franchise.
Marinus Pharmaceuticals: A cure for the blues?
Depression is one of the most common ailments hardly ever talked about. This tiny pharma company thinks it has an effective treatment. If so, Marinus MRNS, +0.83% could be a big performer. We may find out more very soon. Potential catalysts loom in the form of key study results due out in the next four to six weeks, says Steve Schuster, a money manager at Bridge Street Asset Management who likes to take positions shortly ahead of stock-moving news. “Two very important readouts are coming in a matter of weeks,” he says.
Schuster is worth listening to on biotechnology, because he’s made good catalyst-driven calls in Ariad, which moved up a lot on a takeover by Takeda Pharmaceutical TAK, +0.57% and Catalyst Pharmaceuticals CPRX, -0.28%
Marinus has a drug called ganaxolone, which looks like a potentially effective therapy for depression. Marinus claims ganaxolone has a mechanism of action similar to that of a depression drug being proven out by Sage Therapeutics SAGE, +0.32% which has a $178 stock price and $9 billion market cap.
Marinus released the results of two safety studies of ganaxolone in December. The studies verified safety, but they also suggested ganaxolone works against depression. We’ll learn more when the company releases further results from these studies soon. Marinus is also studying ganaxolone for epilepsy. Results from epilepsy studies are due out next year.
Cleveland-Cliffs: Made in America
Cleveland-Cliffs CLF, +1.75% is a company President Donald Trump would love. It is the largest U.S. iron-ore producer, and Trump loves big. It has a near-monopoly as a supplier to the old-school, basic blast furnace steel makers around the Great Lakes. This gives it a little pricing power in a commodity business, and it shields the company from competition. The source of the monopoly: Cleveland-Cliffs owns most of the iron ore mining capacity around the Great Lakes.
But none of this is what really makes Cleveland-Cliffs a company to win over the president’s heart. Instead, Cleveland-Cliffs is investing heavily to move beyond basic iron ore pellets for blast furnaces, so it can produce hot briquetted iron (HBI). HBI is used in the more modern, electric arc furnaces (EAF) that produce more valuable kinds of steel. As Cleveland-Cliffs supports the growth of EAF, it will help displace steel imports to the Great Lakes region from Russia, Ukraine, Brazil and Venezuela. This plays right into Trump’s favorite “made in America” theme.
The transition should also make the stock go considerably higher, believes Colin McWey who manages the Heartland Mid Cap Value Investor fund HRMDX, -0.09% which owns Cleveland-Cliffs shares. The profit margins on HBI products are significantly higher, and EAF steelmakers are taking share from blast furnaces, says McWey.
Both trends will be good for Cleveland-Cliffs. “Their capital spending drops dramatically over the next two years, once the HBI build is finished. So their free cash flow will be turbocharged with both higher margins and lower capital spending,” says McWey.
McWey predicts Cleveland-Cliffs will throw off over 20% of its current market cap in annual free cash flow, more than twice the typical steel maker. McWey is worth listening to because his fund beats competing funds by 2.4 percentage points annualized over the past three years, according to Morningstar.
Comstock Resources: The Dallas Cowboys of natural gas
Dallas Cowboys owner Jerry Jones made his early fortune in energy. He used some of the profits to buy the Dallas Cowboys, and made a bundle there, too. Now, he’s returning to his roots by doubling down on an investment in this tiny natural gas producer in Texas.
Jones just plowed another $475 million into the company for newly issued stock at the equivalent of $6 a share, and $175 million worth of convertible preferred shares. This brings Jones’ total investment in Comstock CRK, +2.50% to $1.1 billion. He now owns 75% of the company. The most recent cash infusion supports Comstock’s acquisition of Covey Park Energy, which builds out Comstock’s presence in the Haynesville energy field in Texas.
“This is his largest investment by far,” says Mike Breard, a retired, former energy sector analyst for Hodges Capital Management. “He thinks it could be his most profitable investment.” Most investors hate the natural gas sector now, so it makes sense as an investment for a natural contrarian like Jones. Natural gas could go up in price as more pipelines are built to get the excess out of U.S. as liquid natural gas (LNG), and more petrochemical plants come on line.
“He thinks gas prices will go up, and I agree with him,” says Breard, who owns shares of Comstock. The post-merger Comstock will also benefit from better bargaining power with services providers and cost cutting, says Breard.
Century Casinos: A gamble in casinos
Another acquisition play, Century Casinos CNTY, -0.93% in mid-June agreed to buy three casinos from Eldorado Resorts ERI, +0.59% for $107 million. The casinos, two in Missouri and one in West Virginia an hour from downtown Pittsburgh, will add to Century’s diversified holdings of gaming operations in Canada, the U.S., Poland and England.
Century Casinos shares jumped on the acquisition news, because the purchase will substantially boost Century Casinos’ revenue and cash flow, says Corbett at Perritt Capital Management, which owns the stock. Now that the stock has retraced much of the initial buyout boost, you can pick up Century Casinos shares to benefit from the acquisition — without paying the initial premium.
At the time of publication, Michael Brush had no positions in any stocks mentioned in this column. Brush has suggested CRK in his stock newsletter, Brush Up on Stocks. Brush is a Manhattan-based financial writer who has covered business for the New York Times and The Economist Group, and he attended Columbia Business School in the Knight-Bagehot program. Steve Shuster subscribes to Brush Up on Stocks.