We looked for undervalued stocks trading under $5. All the stocks on this list have valuable assets but have been beaten down for a variety of reasons. The list includes a few industry giants going through rough patches, and also some smaller firms that could be on the rise. Here is the breakdown:
Citi (C): The banking giant, with a market cap of $128.43B, seems to finally be pulling out of the financial crisis. Earnings were once again positive in 2010, and are expected to grow a good amount in the next few years. Citi is trading at a price/book ratio of only .79, despite the renewed earnings and solid 15.22% operating margin. The company recently reinstated a dividend of 1 cent per share, a mostly symbolic gesture to show that the company’s financial conditions are improving. Analysts expect the dividend to be raised to a more significant amount by 2012. One of the biggest American banks, Citi is well diversified globally, with operations around the world. With its extensive resources, it should be able to position itself for success down the road. Nonetheless, Citi will not be under $5 for long. The company has announced a reverse 1-10 stock split. While partly a psychological move, the reverse split will also allow institutional investors, many of whom cannot buy stocks that trade under $5, to buy Citi stock. This should enlarge the investor base and potentially drive up the share price. Guru investor Bill Ackman is also a shareholder.
Full House Resorts (FLL): Full House, which owns and operates resorts and casinos around the U.S., has a market cap of $67.7M. Although small, the company is one of the financial stalwarts of the industry. With no long-term debt and a current ratio over 11, the firm had at an outstanding 56% operating margin in 2010. ROE was above 17%. Despite the strong fundamentals, FLL is trading at a low valuation compared to its peers. Its P/E of 8.9 and price/cash flows of 3.8 are both near the bottom of the industry. Additionally, the company has grown rapidly the last few years – 2010 EPS grew 65% year over year, after 225% growth in 2009. This growth has continued in the last few weeks, as the firm was approved for an Indiana gaming license. This allows it to complete its acquisition of the Grand Victoria Casino. If the economy continues its recovery, Full House should be in a prime position to come out as a winner.
Sprint (S): With a market cap of $13.88B, Sprint has had negative earnings the last couple of years. Nonetheless, cash flow has remained positive, with $1.61 of cash flow per share in 2010. Trading at a dirt-cheap price/sales of $0.42, Sprint added 1.7 million net subscribers in 2010. We think the market is too focused on Sprint’s recent issues. The firm has valuable assets and a solid subscriber base, and is on an upward trend in terms of customers. If it can improve efficiency, the stock price should see a sharp rise.
However, the big news right now is the pending AT&T (T) acquisition of T-Mobile. Sprint had supposedly been in merger talks with T-Mobile, and many people see them losing out from the announced deal. However, merging with T-Mobile would have added a 4th different technology to Sprint’s network, reducing the possible benefits. Furthermore, the pending merger should remove one of Sprint’s main competitors for the lower end of the market, leaving it as the main alternative to AT&T and Verizon (VZ), the two big carriers. Additionally, this deal could be the first of several in the wireless industry. It would not be surprising to see Sprint involved in a deal of its own, whether as a buyer or seller, possibly even selling to Verizon.
Denny’s (DENN): Denny’s, the family restaurant chain, has a market cap of $408M, and is trading at a P/E of 18.5. Although recent years have been tough, earnings growth is expected to be strong. With a PEG of only .5, Denny’s is trading at a tiny valuation relative to it expected growth. Although its current ratio appears low, at .69, it is currently at its highest point in the last ten years, showing improved financial conditions. Institutional investors have also increased purchases of the stock in the current quarter, a sign that investor sentiment is rising on the stock. As business picks up and people eat out more, Denny’s should see strong growth.
SciClone Pharmaceuticals (SCLN): SciClone is a biopharmaceutical company with a market cap of $189.7M that focuses on treatments for cancer, hepatitis and other life-threatening diseases. Although it is an American company, the firm primarily markets their drugs in China, with a presence in other regions such as Latin America as well. The company’s main drug, Zadaxin, is approved for treatment of hepatitis B in over 30 countries. It has also completed phase 2 of approval for Liver Cancer in the U.S. and Melanoma in Europe, and has completed phase 3 for hepatitis C in Europe. Two more SciClone products are entering the commercialization stage in China, with more products still in the approval process in countries around the world. According to the IMS Health, the Chinese pharmaceutical market is expected to grow by 25% in 2011, and will become the second largest pharmaceutical market by 2015.
Demonstrating China’s growth potential, SciClone’s EPS jumped 72% in 2010, and are expected to grow significantly by 2013. The stock has a PEG ratio of only .6, according to Morningstar. The trailing P/E is also very favorable, at a multiple of 10.1, well below the industry average. With almost no debt and a current ratio over 7, SCLN’s operating margin in 2010 was 26.31%, also near the top the industry. Further proving the point, the firm had $21 million in free cash flow in 2010, and had a ROE of 30.21%. Assuming China’s pharmaceutical market grows anywhere near analyst estimates, SciClone’s strong performance should pay off for investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.