5 Potentially Big Gainers Under $5

by: StreetAuthority

by David Sterman

I'm a big fan of low-priced stocks -- especially those that are under $5 a share. At that level, most mutual fund managers are restricted from owning them. But if growth plans pan out and shares move above that threshold, those same fund managers then have the green light to buy in. And once they do, these stocks can keep moving even higher.

Among the various stock screens I maintain, one is for this low-priced group. I give it a fresh look every month or two to see if it's time to get excited about the names on this watch list. I try to calculate the upside I see for each name and put in extra work on the potentially big gainers. Here's my Fab-Five right now.

1. Biodel (Nasdaq: BIOD)

This has been a frustrating stock for many investors, but with a few breaks it could double, triple or even quadruple your money.

Biodel has developed a device that enables insulin to quickly enter the bloodstream. If the device gets approval from the Food and Drug Administration (FDA), the company would face a major opportunity in the diabetes market. Trouble is, the FDA rejected Biodel's application in early November, citing a lack of data to support it. Shares quickly lost half their value and now trade under $2.

That FDA pushback has led management to conduct further studies -- a less-than-ideal result considering the company has just $22 million in the bank. As a result, Biodel may need to raise more money to complete clinical trials. Current cash levels are sufficient for about another year. But the new trials could take at least two years and another $20 to $30 million, implying 25% to 35% dilution at current prices.

Maybe a capital raise won't be necessary. Analysts at Wedbush Morgan suggest that Biodel would make a fine acquisition target, noting that the company's $50 million market value greatly discounts the company's sales potential. If a buyer doesn't emerge and Biodel goes ahead and raises more money, shares could fall to $1.50 (though the long-term potential would remain in place). A sale of the company could yield $5 or even $8 a share -- plenty of risk, but plenty of potential reward as well.

2. Pharmathene (AMEX: PIP)

This is a confusing play at first blush. Pharmathene has just wrapped up a lawsuit seeking major damages from Siga Technologies (Nasdaq: SIGA) regarding an agreement the companies may (or may not) have had to jointly benefit from an important smallpox drug that the U.S. government plans to stockpile in large volumes. A resolution to the lawsuit is expected in the late spring -- or sooner -- and Pharmathene could get hundreds of millions of dollars if it prevails. It's a hard case to handicap, and media reports from the trial indicate that neither the plaintiff nor the defendant emerged as a clear-cut winner. This $3 stock could end up approaching $10 -- or more -- in a best-case scenario, although a move below $2 would be the likely outcome if Siga Technologies prevails.

3. Denny's (Nasdaq: DENN)

Shares of this restaurant chain have risen 51% since I recommended it last August and I think another 50% move may be ahead if the economy gets a little healthier.

This is another retail business model with ample fixed costs, and plenty of operating leverage. Per-share profits are rising at a fast clip and could exceed $0.40 this year. In an improving economy where time-stressed consumers are more likely to dine out, I think earnings power could approach $0.60 or $0.70 a share, which would likely push this $4 stock above the $6 mark.

4. BSD Medical (Nasdaq: BSDM)

Back in January I looked at a trio of high-upside stocks.

Since then, shares of Biolase Technology (Nasdaq: BLTI) have more than doubled, while Research Frontiers (Nasdaq: REFR) is up a solid 20%. Yet it's the third stock in that group, BSD Medical, that is my focus right now. As I noted a month ago, the company's heat-focused cancer-treating technology looks promising. All the company lacks is a clear customer base.

The wait may be coming to an end. BSD has secured a few recent deals, highlighted by a just-announced contract for the sale of a device to 21st century Oncology, a radiation therapy center with 98 locations. If this first device earns its keep, might 21st Century order more to place in its other centers? I'm keen to listen to the company's next conference call, which will likely come in early April, to see what the sales pipeline looks like.

Cash of about $19 million looks healthy in the context of a $1 million quarterly cash burn rate, but investors need to see real growth taking shape. That may not come for several more quarters, if at all, but it's hard to deny the very strong clinical data that BSD's devices have shown. The company's current $140 million market value could eventually double or more if BSD starts to generate a rising tide of sales.

5. Hercules Offshore (Nasdaq: HERO)

The moratorium on drilling in the Gulf of Mexico in 2010 as a result of the Deepwater Horizon offshore oil spill created all kinds of havoc for key industry players. One company, Seahawk Drilling (Nasdaq: HAWK), suffered so much from its equipment sitting idle that it had to auction off its drilling rigs at fire-sale prices. That was a stroke of luck for Hercules Offshore, which paid about $100 million for an estimated $400 million in assets, including 20 drilling rigs. As an added bonus, Hercules just saw Seahawk, a key rival, drop out of the business, which should help lease rates firm up when shallow water drilling resumes.

Hercules itself carries far too much debt. If the drilling slowdown continues for an extended period, then shares, currently trading near $4, could re-visit the 52-week low of $2. But the debt load is actually now more palatable to lenders because there are more assets to put against the borrowings. The transaction may have paved the way for Hercules to avoid more restrictive bank covenants that would have loomed later this year. Book value (a measure of a company's assets) now stands at $8 a share, or roughly twice the current stock price. Despite that compelling value, shares may stay range bound until activity in the Gulf picks up. But keep an eye on this one.

Low-priced stocks often carry considerable risk. The only "safe" name in this group is Denny's, although every one of these stocks could see sharp upside if a few breaks bounce their way.

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Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.