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There is often more risk and more reward in buying stocks that trade below $5. I like to focus on these types on investments because it can be especially profitable buying stocks that are trading at or near 52-week lows, which still have a very significant amount of upside potential that many (if not most) investors have given up on. In 2012, a couple of the best examples of low-priced stocks that surged might have been Sprint (NYSE:S) and Clearwire (CLWR). Both of these companies had been reporting losse,s and had stocks that traded for about a buck or two before more than doubling or even tripling in value.

Both of these companies also saw either a major outside investment offer or a takeover bid. Sprint shares jumped after it received an investment by another larger company (Softbank) and in turn, Sprint announced plans to acquire the rest of Clearwire (that it does not already own) for about $2.2 billion, which is equivalent to about $2.97 per share. However, Dish Network (NASDAQ:DISH) just raised the stakes with a bid at $3.30 per share. Sprint seems to have upside left, with at least one analyst at Argus Research setting a $7.50 price target. Clearwire shares might become volatile with this latest Dish bid, but the easy money has probably been made in this stock. That's why Clearwire shareholders should consider taking at least some profits now (especially to hedge against the potential risk of the deal falling through due to regulatory approvals or other reasons), and re-investing in what could be the next stock to more than double. Both Sprint and Clearwire are excellent examples of stocks that looked speculative, and even sensible to short if you only focused on the negatives, however, these stocks were great buys near the lows and went on to double, and even triple, for some investors. With that in mind, here are a couple more stocks that look deeply undervalued, which could potentially even double in value:

Furniture Brands International, Inc. (FBN) shares have declined to just about $1 because investors have been disappointed by recent financial results. The furniture industry has been hit hard by the weak economy and the housing crisis, and this company has been working to slowly but surely to complete a turnaround. For some investors it is not coming soon enough, and management could come under significant pressure to change course and consider selling some of the valuable brands this company owns, if not the entire business. This company owns some of the most recognized brands in the furniture industry, which include Drexel Heritage, Henredon, Broyhill, Hickory, Thomasville, Lane Furniture, Lane Venture, and others. This company could potentially sell just one of these brands and use the proceeds to strengthen the balance sheet and pay off debt.

Furniture Brands has just over $1 billion in annual revenues, about $83 million in debt and around $15 million in cash. As it has been reporting losses in 2012, it is a higher risk, but possibly also a higher reward stock. It is heavily shorted and any good news, an asset sale or a buyout of the company could lead to a major short squeeze. According to Shortsqueeze.com, there are about 3.6 million shares short. Since this stock trades about 225,000 shares on an average day, the shorts have a position that is equivalent to about 16 days worth of volume. That is significant, and it could create a short squeeze rally. If you look at this company in terms of the lack of recent operating profits, the shorts appear to be absolutely right, but if you look at the value of the very famous brands this company owns and the market capitalization to sales ratio, the shorts appear to be taking great risks with this stock at just over $1 per share.

The risk for longs is that the company will continue to drift lower in terms of its financial results, and that no turnaround will take place. If that is the case and if management is unable or unwilling to sell one or more of the brands or the entire company, then this stock could be a loser for shareholders. However, many potential positives have to go by the wayside before that seems likely. At just around $1 per share, shorts might have more downside risk than upside potential, and if just one thing goes right (such as a financial turnaround, the sale of a brand, or a takeover offer), then this stock could have a major run to the upside.

There are emerging signs that the housing market is turning around, and a strong housing market in the future could lead to a major turnaround in the furniture industry. A larger company with significant cash or borrowing resources might also find Furniture Brands to be an attractive takeover target in anticipation of a rebound in real estate. Furniture Brands has a market capitalization of just about $60 million, and for a company with annual sales of over $1 billion, that appears way too low, especially considering it owns so many valuable brands some of which could (alone) be worth as much or more than the entire market capitalization of this company.

This company seems serious about stemming the losses, and in the first few days of January 2013, it announced layoffs of over 100 people each at least two of its manufacturing locations. Companies often go forward with layoffs in an effort to prepare for a sale, or to achieve a financial turnaround. It's too early to tell if that is enough to help turn around the financial results, but it can certainly help and make the scaled-down company more attractive as a takeover. With the market capitalization now equivalent to about 6% of annual revenues, a slight improvement in sales and a return to profitability could lead to a big move in the stock. At this point in time, it seems that management should be considering a sale of the company or at least one of the brands as part or a restructuring or turnaround. If either of those scenarios plays out, it would not be surprising to see the stock head back towards the 52-week high, which is about double the current share price.

Key Data Points For Furniture Brands (from Yahoo Finance):
Current Share Price: $1.02
52-Week Range: 88 cents to $2.10

Mela Sciences, Inc. (NASDAQ:MELA) is a small company that has developed a non-invasive tool that helps dermatologists detect melanoma (skin cancer) while it is still curable. Mela Sciences has created MelaFind® to provide information to dermatologists during melanoma skin examinations. This key product is used when a dermatologist is deciding whether to biopsy skin lesions. The company states that:

"The FDA has approved MELA Sciences' MelaFind® Pre-Market Approval application for use in the United States. Following completion of a successful conformity assessment procedure MELA Sciences has also been granted CE Mark approval for sale of MelaFind® in the European Union."

Melanoma and other types of skin cancer have risen dramatically due to excessive outdoor sun exposure, sun tanning booths, longer lifespans, etc., and early detection is key to successful treatment. While Mela Sciences has been working on this device and the FDA approval for years, it only recently began commercial marketing programs. That's why this little-known company could now be a ground-floor opportunity for investors and become a growth stock over time. With product approval out of the way, the risks for investors are greatly reduced. However, as always, some downside risks remain. If the device is slow to be adopted by the medical community, it could take longer than expected for Mela Sciences to become profitable. That could keep the stock from moving up much, if sales results do not measure up. However, it does look like the medical community is excited about this new device, and the company is getting the word out in a big way.

MelaFind was recently (just weeks ago) selected as one of the top 10 medical innovations for 2013, as compiled by the well-known "Cleveland Clinic." Each year, an independent panel consisting of leading physicians from the Cleveland Clinic makes this list, and the criteria for inclusion are significant clinical impact, high probability of commercial success, and significant human interest. This lends support to the idea that the MelaFind device could be a game changer for the dermatology industry and skin cancer in general. That also means MelaFind could soon be a game changer for the stock price.

Since the product was only launched recently, it could take time for sales momentum to build, but as we have seen with many game changing tech and medical devices, once a product reaches critical mass, revenues can grow exponentially. That's why buying some shares of this high-potential company makes sense now. Insiders have been buying throughout the past year, and Joseph V. Gulfo (President and CEO) purchased another 10,000 shares on November 12, 2012, at $2.68 per share.

Furthermore, there are a large number of shorts who have beaten down the stock over the years (and past few weeks) as the company incurred major development and approval expenses. However, the company is now starting to have major revenue potential that it never had before, and with many shorts still in the stock, this could fuel a major short-squeeze rally in the stock. According to Shortsqueeze.com, there are nearly 5 million shares short. Since it trades about 180,000 shares on an average day, the short position is equivalent to about 28 days worth of volume. There are a number of factors that could trigger a short squeeze rally, which includes better than expected sales of MelaFind, more insider buying, a joint venture with a major medical devices company, or even a possible takeover of this small company.

There are a number of major medical device companies that could view the recent FDA approval, product launch and Cleveland Clinic selection of MelaFind as catalysts to buy the entire company, especially since a major player in this industry could greatly accelerate the commercialization of MelaFind. Mela Sciences might make sense as an acquisition by companies like Johnson & Johnson (NYSE:JNJ) or Boston Scientific (NYSE:BSX), both of which have been known to buy smaller companies with attractive technology, products and patents. Mela also has a strong balance sheet with no long-term debt and around $13 million in cash, which makes it more attractive and reduces risks.

This stock seems to have suffered from year-end tax loss selling in the last couple months of 2012, but in recent trading sessions, the shares have been showing strength and a heavy increase in volume. That means the momentum could be shifting to the upside, and the stock could be poised for a breakout and rally back to around $2.50 to $3 in the near term. It traded at these levels in November, before tax-loss selling took its toll. Analysts at WBB Securities have rated the shares as a "speculative buy" and set a $4 price target. That would provide investors who buy now with more than a double.

Key Data Points For Mela Sciences (from Yahoo Finance):
Current Share Price: $1.88
52-Week Range: $1.65 to $5.13

Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.

Source: These Neglected $1 Stocks Could Offer Major Upside In A Short Squeeze Or Takeover