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Published: December 10, 2009
Never judge a stock by its share price.
Just because a stock trades for $5 does not make it "cheap."
Conversely, a stock that trades for $100 is not necessarily
"expensive." Millions of investors ignore this. Mention a stock
and the first question out of most investors' mouths is "How
much does it cost?"
Consider Berkshire Hathaway (NYSE: BRK-B). The 'B' shares
of Warren Buffet's holding company trade for about $3,300.
That's a tidy sum, but it's a song for what investors are
getting: The most successful investor in the world managing
their money. Berkshire has a high share price, but it's easily
one of the best values on Wall Street today.
Not only is share price a poor indicator of actual value, it's
also not a good predictor of an investment's risk.
Wall Street considers any shares trading for less than $5 a
penny stock. While some of these securities may well be
speculative, illiquid companies that trade over-the-counter or
on the Pink Sheets, many others are well known, reputable
companies that have simply hit a rough patch and seen their
share price slide.
If the price drops too far, it can create some headaches,
especially for institutional investors like mutual funds and
pensions. These mega-investors, which typical oversee billions
of dollars in assets, must follow certain rules that are
designed to mitigate risk. Many are often barred from buying any
"penny" stock that trades for less than $5. In some cases
institutions may even be compelled to sell securities whose
stocks fall below the $5 threshold. This can flood the market
with shares and drive the price down further.
But the opposite effect also can occur, and that's today's
opportunity.
When a security that had been trading at below the $5 threshold
rises back above it, institutions -- and even some individual
investors -- tend to pile back in.
Here are two stocks within striking distance of $5:
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Apparel maker Liz Claiborne (NYSE: LIZ) and gun maker
Smith & Wesson (Nasdaq: SWHC) were beaten down during the
market's slump, but both are making strong comebacks. These two
well-known brands should reach the $5 mark soon and could both
see a further bump once that happens.
Liz Claiborne
Liz Claiborne was left for dead in March. The low capped a
two-year decline that saw the stock nosedive from about $45 to
as low as $1.61 a share. Liz had racked up expenses for years,
and when the untimely combination of declining sales and the
credit crunch hit, the company went into crisis mode.
To make matters all the worse, it was clear the Liz Claiborne
brand -- the company owns several others -- had lost a step.
Management rolled up its sleeves to remake the flagship brand,
hiring a marquee designer to reinvent the label and retarget
professional women, the brand's bread-and-butter clientele. As
the Liz Claiborne brand is retooled, the company is counting on
results from younger customers attracted to higher-end fashions
from Lucky Brand Jeans, Juicy Couture and Kate Spade.
Investing in Liz Claiborne is a turnaround bet. Retail is a
cutthroat business, but comebacks are possible. LIZ trades at
about $4.50, but shares could easily reach $10 or more if the
ship is righted by the end of 2010, as management predicts.
On a side note, it was almost one year ago to this day that my
colleague Andy Obermueller dedicated an entire Investor
Update issue to Liz Claiborne's rebound.
He predicted that several "profit catalysts" would propel
the stock to triple-digit gains. The catalysts are working: as I
write this, LIZ is up +80% in 2009 -- tripling the S&P 500
(another Andy prediction).
Visit this link to see which catalyst-driven stocks we predict
to surge in 2010.
Smith & Wesson
Shares of Smith & Wesson have been on a skid since the company
reported that future sales growth was likely to decline.
Guns have flown off the shelves since President Barack Obama and
other Democrats won control of Capitol Hill last November. Gun
owners, fearing that Democrats typically support gun control,
proceeded to stock up before any such laws were tightened.
The run on guns may be ending, but Smith & Wesson is still worth
considering. The company expects sales growth between +8% and
+14% in the fiscal third quarter -- a far cry from the +49% jump
in the previous quarter, but enviable nonetheless.
The value of the Smith & Wesson brand alone makes the company
intriguing. Horace Smith and D.B. Wesson first began making
revolvers in 1852. The popular .38 Special ammunition has been
used by nearly every law enforcement agency in the world at some
point. The Model 10 handgun has been in continuous production
since 1899, with more than six million units made.
Smith & Wesson trades for seven times earnings, compared with a
two-year average of more than 20 -- implying an upside of +185%.
If Congress even remotely considers gun control, shares are
likely to return to a similar valuation.
-- Brad Briggs
Staff Writer
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