5 Stocks Under $5 To Buy With Upside And Good Reasons To Rally

Includes: GRPN, NOK, S, SIRI
by: David Alton Clark

The Gist

According to the Congressional Budget Office, the U.S. would slide into recession next year and unemployment would rapidly increase without a compromise on the fiscal cliff. Sounds pretty scary, huh? On the other hand, it sounds like an excellent buying opportunity. The politicians have a method to their madness that resembles an old fashioned game of chicken. Both sides will hold out till the last minute in hopes of improving their position. Then at the last moment they will come together and make a deal saving the day and giving them the opportunity to play the hero as they announce the agreement.

I posit there is no way either side will allow the U.S. to fall off the fiscal cliff, yet there are many who are not so sure. This may provide an opportunity to buy stocks in solid companies with strong catalysts for future growth.

The Goods

The following five stocks have certain positive fundamentals and share prices trading at or below $5. Stocks trading for $5 or less tend to be more volatile with frequent, larger percentage moves in the stock price. This provides the opportunity for greater returns (or losses) relative to the market. These are stocks with market caps of $2 billion or greater that may provide more bang for your buck.

In the following sections, we will take a closer look at these stocks to ensure the mean target prices are justified. We will perform a brief review of the fundamental and technical state of each company. Finally, we will determine if a catalyst for growth exists for the companies based on sector, industry or company specific dynamics. The following table depicts summary statistics and Friday's performance for the stocks.

Alcatel-Lucent, S.A. (ALU)

The company is trading 59% below its 52-week high and has 15% upside potential based on the analysts' mean target price of $1.26 for the company. ALU was trading Friday for $1.10, up 10% for the day on news of a possible loan from Goldman Sachs.

Fundamentally, ALU has several positives. EPS growth for next year is expected to be 65%. ALU is trading for approximately 59% of book value. The company has $2.57 in cash per share. Book value per share is $1.88.

Technically, ALU has been in a well-defined trading range between $1 and $1.20 for the last several months. The stock recently breached resistance at the 50-day sma. In my latest missive regarding the stock, I suggested buying the stock at the $1 mark. If you took that advice you would be up 10% as of Friday. Alcatel-Lucent has rallied in recent weeks based on the news AT&T (NYSE:T) plans to spend $22B on capex each of the next 3 years. The telecom sector is growing by leaps and bounds currently. Cisco (NASDAQ:CSCO) recently beat estimates and provided good fiscal Q1 guidance underpinning ALU's stock price as well.

The recent pop was based on news ALU is in talks with Goldman Sachs Group Inc. (NYSE:GS) about "obtaining a loan to strengthen the unprofitable network equipment vendor's balance sheet," according to a recent article by Bloomberg. This would essentially buy more time for the company to get back to profitability. The risk reward ratio is favorable for the long haul at this point. The stock is a buy at this level.

Clearwire Corporation (CLWR)

The company is trading 25% below its 52-week high and has 24% upside potential based on the analysts' mean target price of $2.75 for the company. Clearwire was trading Friday at $2.21, up nearly 2% for the day.

Fundamentally, Clearwire has a few positives. EPS is up 78% quarter over quarter. EPS is expected to be up 35% next year. The company has $0.81 cash per share. On November 8th RBC Capital Markets upgraded the stock from Underperform to Sector Perform and raised their price target from $1.50 to $2.50.

Technically, Clearwire had a parabolic spike after positive comments were made on the earnings conference call. The stock is currently trading 5% above the 20-day moving average. The stock has been consolidating for the last month after the parabolic move higher. The golden cross was achieved in mid-October.

I posit Sprint (NYSE:S) will complete the purchase of Clearwire after the Softbank deal is finalized. RBC Capital analyst Jonathan Atkin raised his rating on the wireless broadband carrier to Sector Perform from Underperform for the same reason.

Atkin stated:

Softbank's pending acquisition of 70% of Sprint's shares increases the possibility that Sprint buys the Clearwire shares it doesn't already own, and so providing downside protection for Clearwire shares. Our upgrade of CLWR reflects a potential strategic interest in the company (Softbank, via Sprint) that we had not foreseen at the time of our downgrade in August. Following the anticipated close of the Softbank/Sprint transaction in the 2013 first half, we believe a Softbank-controlled Sprint may seriously consider bolstering its spectrum position potentially via an acquisition of Clearwire or a partnership with Dish Network.

I agree with this analysis and feel the risk/reward ratio favors long trades at this juncture. I like the stock here.

Groupon, Inc. (GRPN)

The company is trading 85% below its 52-week high and has 30% potential upside based on the consensus mean target price of $5.12 for the company. Groupon was trading Friday at $3.95, up 2% for the day and 30% on the week.

Fundamentally, the stock has positives. The stock has a forward P/E ratio of 16.46 and trades for 9 times free cash flow. EPS and sales are up substantially quarter over quarter. EPS next year is expected to rise by 41% and by 27% for the next five years.

Technically, the stock is in a well-defined downtrend, yet has leveled off and seemed to find a bottom at the $5 mark until it reported an earnings miss on November 8th and took a major nosedive to the $3 level. Since the stock has rebounded significantly and broke through the first level of resistance at the 20-day sma with no problem.

Monday Tiger Global Investments LP disclosed a 9.9% stake in Groupon on in a filing with the Securities and Exchange Commission. I saw this as a very positive development and suggested buying the stock at $3.11 in my last update on the stock. Kudos to you if you pulled the trigger and bought the stock Monday, it is up 30%. I posit the run has just begun for this name, yet I would wait for a pullback in the shares prior to starting a position at this point. I like the stock long-term.

Nokia Corporation (NOK)

The company is trading 35% below its 52-week high and 26% above its consensus mean target price of $2.62 for the company. Nokia was trading Wednesday for $3.56, up almost 8% for the day.

Fundamentally, Nokia has several positives. Nokia is trading for 1.3 times book value, 33% of sales and has $3.07 in cash per share. EPS next year is expected to rise by 78%. Nokia pays a dividend with a 7.10% yield.

Technically, the stock has rebounded nicely since July and has established an uptrend. In my last missive regarding the stock I suggested the stock was currently in a breakout position at the apex of a descending triangle and a major breakout move was about to occur. The stock is up 30% since that call.

Reports the Lumia 920 has sold out in many stores has been the catalyst for the break out. With a dividend yield of nearly 10% and Microsoft's backing, the risk/reward ratio looks positive for the stock. I want to wait for a down day to pick up shares in the stock though. I am hoping the fiscal cliff effect will provide this opportunity. It is hard for me to jump in a stock after such a big move. I do like the stock long term. There should be upgrades coming on the heels of all the recent good news soon which may spur the stock even higher.

Sirius XM Radio Inc. (SIRI)

The company is trading 7% below its 52-week high, and has 14% upside potential based on the analysts' mean target price of $3.16. Sirius stock was trading for $2.78 Friday, up nearly 2% for the day.

Fundamentally, this stock has several positives. SIRI has a forward P/E of 27, and trades for 22 times free cash flow. EPS for the next five years is expected to rise by 28%. Quarter-over-quarter sales are up 14%. SIRI's TTM ROE is 87%, and the company's net profit margin is 103%.

Technically, Sirius stock has been in a well-defined uptrend since the start of July. The coveted golden cross was just achieved by the stock. This is considered extremely bullish. The stock has recovered after breaking through support at the bottom of the current uptrend channel and the 50-day sma.

In my last missive regarding the stock I stated to wait for the stock to find a bottom prior to starting a position. I believe that has occurred. I expect the next catalyst will be the announcement of the new CEO. This is not always a positive event, but I feel the stock is a buy regardless. Car sales are up substantially and the company's fundamentals should underpin the stock price at this level. Once the uncertainties of the CEO are resolved I expect the stock to continue higher. I like the stock here.

The Bottom Line

The market may experience substantial volatility in the next few weeks as it reacts to headlines regarding the resolution of the fiscal cliff. Use these pullbacks as an opportunity to start positions in your favorite stocks on your watch list. I expect the fiscal cliff situation to be resolved and the market to rally in 2013.

Let's not forget, the world's central banks have been taking action and the Bernanke put is firmly in place until 2015. I have chosen stocks I feel have notable upside long-term but are down substantially from their all-time highs.

Before buying any stock do your own due diligence first. If you do decide to start a position, I suggest layering in a quarter at a time on a weekly basis at a minimum to reduce risk. Build the position slowly.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in NOK, GRPN, SIRI, ALU, CLWR over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This is not an endorsement to buy or sell securities. Investing in securities carries with it very high risks. The information contained within this article for informational purposes only and is subject to change at any time. Do your own due diligence and consult with a licensed professional before making any investment decisions.