by Jeff Reeves | November 29, 2012 1:17 pm
Let me make this clear right away: Cheaper stocks are not easier to buy than expensive ones; cheaper stocks do not inherently have a better chance of making you more money or making you profits any faster; round lots of stocks are not any better or worse than owning a handful of shares.
However, it’s indisputable that many investors gravitate toward low-priced investments.
They typically are more volatile than high-priced peers, and that makes for the possibility of bigger gains in a shorter period of time.
So for those of you looking for cheap investments, here are my five top stocks under $5 for 2013: Wet Seal (NASDAQ:WTSLA), Sirius XM Radio (NASDAQ:SIRI), Wendy’s (NASDAQ:WEN), 1-800-Flowers.com (NASDAQ:FLWS) and Star Scientific (NASDAQ:STSI).
One word of warning, however: Many of these stocks are very small and as a result are notoriously volatile. And most of them are cheap because of previous troubles beating them down on negativity. Be aware that you’re taking the tiger by the tail here, so protect yourself with limit orders and stop losses.
With that disclaimer in place, let’s get to the picks:
I am a big believer in a surge of consumer spending in 2013. That means retail stocks could be on the rise, and Wet Seal (NASDAQ:WTSLA) is a hot name that’s worth watching.
This specialty retailer operates about 550 stores that sell clothes and accessories to young women. The company has had occasional bright moments, but the stock has been a volatile play, swinging between $3 and $5 for the better part of four years. Right now shares are at the bottom of that range thanks to recent troubles, but bluer skies may be ahead.
The specifics behind Wet Seal’s slide — down about 12% so far in 2012 — includes a big fight earlier this year when the Clinton Group won a proxy battle to name new directors to the board of the company. That distraction didn’t just weigh on shares, but also on strategy and performance. Wet Seal most recently posted a same-store sales decline of 5.4% and an operating loss for its fiscal third quarter to follow up a loss in Q2 as well.
But as the dust settles, there’s reason to be hopeful. Revenue is back to pre-recession levels, though admittedly tracking a year-over decline thanks to the drama, and a board shakeup could be just what Wet Seal needs to energize the company in 2013 as the company closes unproductive stores and looks to replace members of the previous management regime with better leaders.
It’s risky and it’s a turnaround, but I think the convergence of a secular consumer recovery and a new strategy bodes well for Wet Seal in 2013. Buying in 2012 amid the chaos was certainly a risky endeavor, but it looks like stability is finally coming to Wet Seal.
Yes, satellite provider Sirius XM Radio (NASDAQ:SIRI) is in a tough spot since terrestrial radio remains pretty entrenched and streaming radio from companies like Pandora (NYSE:P) continue to gain momentum. But don’t count SIRI out yet.
In its latest earnings report, despite a lower bottom line that missed earnings targets, it posted continued subscriber growth and revenue growth that beat the Street. The problem of consistent profitability remains a weight on shares, but it’s important to understand that revenue continues to climb — this is hardly a company with its best days behind it. It’s up about 50% year-to-date in 2012.
What’s more, it’s important to remember that a big driver of growth (pardon the pun) for SIRI is the packaged sale of Sirius XM access with new vehicles … and incremental improvement in the auto industry means a boost to subscribers.
Though perhaps a bit overbought in the near term as it hovers near four-year highs, Sirius XM stock could be a nice buy on a pullback. And a bonus is that unlike some of the other picks on this list, SIRI is very liquid and trades millions of shares daily, so you won’t be exposed to low-volume volatility.
Wendy’s (NASDAQ:WEN) has gone through some big changes in the past few years, including the sale of lagging Arby’s Restaurant Group and its first logo change in 20 years. But though restructuring costs and lost Arby’s revenue crimped performance in early 2012, the company looks to be back on track.
The past two quarters, which are more representative of the post-Arby’s company, have boasted year-over-year revenue increases. The company is also riding the sixth consecutive quarter of same-store sales gains. Yes, the company posted a wider loss and missed profit estimates, but the all-important top line is healthy — and as the company’s restructuring takes hold, the profits should follow.
Furthermore, the leadership of Emil Brolick is a huge plus. Brolick successfully rejuvenated fast-food giant Yum! Brands (NYSE:YUM) through international expansion, creating in the process a company that now generates more than half of its operating profit from China. With this guy as president and CEO of Wendy’s, investors should expect global growth is in store for Wendy’s despite trailing competitors like Taco Bell and McDonald’s (NYSE:MCD) in the international expansion game.
While the name implies telephone ordering, 1-800-Flowers.com (NASDAQ:FLWS) is without a doubt an e-commerce company. It has strategic online relationships with Facebook (NASDAQ:FB), Twitter, Pinterest, Google (NASDAQ:GOOG), AOL (NYSE:AOL), Yahoo! (NASDAQ:YHOO) and other big names the social media and Internet space.
Just consider this recent headline talking about a massive gift-sending promotion on Facebook that boosted not just the social media giant but related companies like FLWS as a result.
After posting a loss in fiscal 2010, 1-800-Flowers.com has gotten its act together. Quarterly revenue has increased in seven of the past eight quarters, and the stock price has rallied 43% so far in 2012. Most recently revenue was up 3% and margins were up nicely. The company did post a loss, but a smaller one — and a loss is typical for the holiday-free quarter between Valentine’s Day and the winter holidays.
With almost no debt and a profitable operation, this is not your typical down-and-out stock in the bargain bin. Though the market cap is a mere $200 million, 1-800-Flowers.com is a serious company with serious potential.
An added bonus: Since 1-800-Flowers.com does most of its business over Christmas and Valentine’s Day, there is still time for investors to get in before the lion’s share of the profits and sales come in. If consumer spending is really on the mend — and if FLWS has its act together — we could see a strong 12-18 months for this stock.
Star Scientific (NASDAQ:STSI) is a very speculative but fascinating company. It has long been working on smokeless tobacco products for those with a nicotine urge but an aversion to the harmful effects of cigarettes, as well as dietary supplements meant to be an alternative to smoking. Check out one of its flagship products, CigRx, here.
The angle is interesting. Smoking isn’t a growth industry, but smoking prevention seems to be gaining momentum big-time.
And beyond that, the company is also researching other tobacco-based drugs including — crazily enough — a potential cure for Alzheimer’s disease, as first riffed on by James Altucher over a year ago.
Of course, shares are off almost 60% so far in 2012 thanks to a massive legal battle with tobacco giant Reynolds American (NYSE:RAI) ended rather unfavorably for Star Scientific. Some folks had hoped for a payday in the hundreds of millions of dollars based on a patent dispute, but the result was a mere $5 million.
Disappointing, to be sure. But Star Scientific is not just a patent troll — they are developing legitimate products. Revenue has been steadily increasing, up year-over-year in seven out of the past eight quarters. The company is still bleeding cash, but the CEO and other insiders just threw $20 million of their own cash at Star Scientific because they believe in the company. That has to count for something.
There are very real risks for the company, including its continued losses and a still-significant portion of shares held short. But if you want a high-risk, high-reward play, STSI could be just the ticket in 2013.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at email@example.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.
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