by Jeff Reeves | April 19, 2013 7:00 am
We saw the major indices log the worst decline of 2013 to start this week, and the pain continued with declines Wednesday and Thursday as well.
Still, we’re still seeing very encouraging macro data — strong demand in the housing market, inflation that is handily under control, continued strength in retail sales … this week’s pain notwithstanding, it’s shaping up to be a pretty good year in 2013.
If you’re looking for a few recovery opportunities, here are five cheap stocks under $5 to consider: Advanced Semiconductor Engineering (NYSE:ASX), Navios Maritime Holdings (NYSE:NM), Frontier Communications (NASDAQ:FTR), Mizuho Financial Group (NYSE:MFG) and Mechel OAO (NYSE:MTL). All have risks, of course, but all could outperform considerably if the recovery gains momentum.
Just take care, since some of these issues trade on low volume. I strongly advise trading with limit orders to protect your purchase price on smaller stocks. And of course, do your own research and consider these picks for a small, aggressive role in your portfolio.
Here’s the rundown on these five cheap stocks:
Advanced Semiconductor Engineering (NYSE:ASX) builds and distributes integrated circuits and other electronics. While at $6 billion in market capitalization it’s not quite the scale of an Intel (NASDAQ:INTC), Advanced Semiconductor does a brisk business providing chips for cellphones, household appliances, automobile components, personal computers and HD televisions among other products. The company is based in Taiwan, close to many Asian electronics manufacturers.
Year-to-date, ASX has been under pressure like many PC-related enterprises. Shares are off about 5% while the S&P 500 has rallied nicely. However, the diverse business of Advanced Semiconductor makes it a bit more stable in the long haul than a company very reliant on laptops and desktops. Furthermore, ASX is not a chip designer and simply a foundry — meaning unlike Arm Holdings (NASDAQ:ARMH) or Intel, it doesn’t have to fund costly research departments to keep up with the latest specs. It simply makes the semiconductors to order.
There may not be breakneck growth here without a secular recovery in consumer spending, but brighter days seem to be ahead in 2013 and 2014 — and that could boost ASX as electronics sales pick up in the next year or so. Furthermore, the reliable revenue from the ASX foundry biz throws off a 2.4% dividend yield as a bit of a hedge.
The company is profitable and the dividend payout ratio is a comfortable 25%, so don’t worry about this company going bankrupt if a recovery in electronics sales doesn’t happen overnight.
Navios Maritime Holdings (NYSE:NM) is one of those Greek shippers that you may have watched collapse in 2008 along with Diana Shipping (NYSE:DSX) and Dry Ships (NASDAQ:DRYS) thanks to an economic downturn paired with an overcapacity glut.
However, though Navios is still down 50% or so from its 2008 peak, it has stabilized and could be a nice recovery play in the years ahead. Much like railroad stocks, bulk shippers rise and fall with economic activity as more consumer goods and commodities are pushed around the globe.
The biggest risk, of course, is that shipping traffic will stay soft — particularly in commodities like iron ore and coal, which are seeing falling demand thanks to trouble in China. But a lot of that negativity has been priced in, and the other business that will pick up in a recovery will help offset any weakness here.
It’s also worth noting that simply being located in Greece has been an anchor (pardon the pun) on this shipping stock. Investors looking to insulate themselves from the European debt crisis aren’t willing to touch any stock in this nation, shipping or otherwise. NM is trading for a big discount right now as a result, and it will see a nice bounce if Europe gets its act together.
Shares of NM stock are up 18% year-to-date. Throw in a 6% dividend yield as a sweetener and you have a decent case for Navios Maritime.
You may wonder why an investor would bother with an also-ran telecom company considering Verizon (NYSE:VZ) and AT&T (NYSE:T) remain so entrenched. But after Sprint (NYSE:S) popped double-digits in a single trading day this week thanks to buyout speculation, there may be some potential here on hints the industry is ripe for further consolidation.
Frontier Communications (NASDAQ:FTR) is a midcap carrier with a $4 billion market cap, and is primed for a buyout. FTR serves 27 states, and is mostly focused on rural telephone and data access. Just recently Verizon bought out Mohave Wireless, a small wireless player in Arizona that was owned by Frontier, so its footprint in underserved areas is clearly attractive to the big guys.
There admittedly isn’t too much growth in this business, and that’s why the stock is flat in the last 12 months. However Frontier is sitting on some attractive customers in regions underserved by AT&T or Verizon, making it an attractive acquisition target.
Oh yeah, Frontier throws off a dividend of 9.8% based on its 10-cent quarterly paydays. So even if FTR just treads water, this cheap stock could deliver a double-digit annual return.
While it might not be a household name to U.S. investors, Mizuho Financial Group (NYSE:MFG) is one of Japan’s biggest banks with a market cap that is larger than Regions Financial (NYSE:RF) and Capital One (NYSE:COF) combined.
Japan obviously has not had a good run of things for the past decade or so. But its fortunes could be changing thanks to aggressive central bank policy and a renewed focus on breaking free from a history of underperformance. MFG stock has beaten the market so far in 2013, and if Japan keeps up its run this could be the first leg in a sustained multiyear rally for Mizuho and other Japanese equities.
The bank trades at about 80% of book value and has a forward P/E of less than 13, so it’s pretty fairly valued right now. But more important, the first sector that’ll benefit from a true recovery in Japan will be banks like Mizuho that provide bigger loans to consumers and businesses.
MFG stock offers up a decent 3.4% dividend to boot.
Mechel (NYSE:MTL) is a Russian steel company that has been taking fire from all sides. Demand has been weak thanks to recent economic uncertainty, so prices have been soft and margins razor-thin. And despite being one of the BRIC nations with Brazil, India and China, Russia has had a rather disappointing growth rate in recent years — including a recent downward revision to 2013 GDP outlook from the IMF.
It’s hard to argue that the negativity has not been priced in after a gut-wrenching 90% drop since 2008 and a 50% drop in the last year alone.
Of course, it just tanked 10% this week on ugly earnings as MTL swung to a loss … so further declines can still happen.
Still, the top line at MTL remains very strong and the steel company is firmly in the black even if operations aren’t running at high margins. Mechel does have $9.1 billion in debt hanging over its head, but a cyclical recovery in the steel business both in Russia and globally could lift the dark clouds and prompt a big move higher.
One of the risks, of course, is that this stock doesn’t have an analyst following and that major industries in Russia can be as inscrutable as state-owned enterprises in China.
But if you’re an aggressive trader who’s willing to speculate on a recovery, Mechel may be for you. Just be ready with a bottle of antacid, because this could be a wild ride. The risks are real but a rebound could be impressive in Mechel.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org 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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