By Michael Barton
The recent market sell-off has been described by analysts as a risk-off trade. Along with the general market, a number of relatively "risky" small cap stocks got dragged down as well. Here we look at five stocks that are currently trading under $5, and ask if they represent the next buying opportunity for investors. Two of the stocks in particular, Midway Gold (MDW) and Majesco (COOL) look very attractive at these levels. Level 3 Communications (LVLT) and 8x8 (EGHT) looks scrawny compared to competitors. And Hansen Medical (HNSN) looks like it could fall further from here. As always, please use the list below as a starting point for your own due diligence.
Midway Gold Corporation (MDW): Shares are trading at around $2.20 at the time of writing, in the middle of their 52-week trading range of $0.55 to $3.03. At the current market price, the company is capitalized at $241 million. Earnings per share for the last year showed a loss of $0.10.
Gold mining stocks should perform well over the next few months, if the gold price recovers from its recent pull back from all time highs. Midway has been a raiser of money, as it has sought financing from shareholders to continue its exploration and production program. This has involved the issuing of shares, but it has recently announced a cessation of such plans going forward saying it has enough cash to continue its business through to the end of 2012. Coupled with a joint venture with Barrick Gold (ABX), this is good news for investors. For those predicting the gold price to rise further, Midway represent good value.
Majesco Entertainment Company (COOL): Shares are trading around $3 at the time of writing, as against their 52-week trading range of $0.49 to $4.53. At the current market price, the company is capitalized at $115 million. Earnings per share for the last fiscal year were $0.24, placing the shares on a price to earnings ratio of 12.24.
Majesco shares have increased in value as the online and interactive gaming market has grown. Microsoft’s (MSFT) recent purchase of Twisted Pixel, the game developer, is a clear signal from a market leader that this market is set to explode further. COOL are well placed to take advantage of this, and its operating margin of 11.85% is far better than competitors Electronic Arts (ERTS), Take Two Interactive (TTWO), and THQ Inc (THQI). Year over year quarterly revenue growth is strong at 61% (ERTS --23%, TTWO –11%, THQI --31%). One of the smaller companies in the sector, the shares look a good buy both on growth prospects and as a possible target in an industry that may see further corporate activity. Buy.
Hansen Medical Inc (HNSN): Shares trade around $3.20 at the time of writing, compared to their 52-week trading range of $1.24 to $5.28. At the current market price, the company is capitalized at $173 million. Earnings per share for the last year showed a loss of $0.37.
Two of the company’s directors have been charged with fraud, and settled with the SEC over the allegations. It was alleged that the company inflated sales figures to increase the company’s reported revenues through 2008 and 2009, in order to encourage investors to buy stock in sales of its shares.
Shares have reacted positively to the settlement, but it does call into question management practice at Hansen. Couple this doubt with annual losses set to rise over the next 24 months, a crumbling revenue stream (second quarter 2011 5.3 million versus $7.0 million in the same period 2010), and medical spending depreciating, and this becomes a story of a stock that could rapidly tailspin into oblivion. If you hold these shares, sell them. If you don’t avoid.
Level 3 Communications Inc (LVLT): Shares are trading around $1.75 at the time of writing, as against their 52-week trading range of $0.84 to $2.67. At the current market price, the company is capitalized at $3.1 billion. Earnings per share for the last year showed a loss of $0.36.
Integrated communications businesses, offering internet and media services could be the winners over the next few years, as more people work and play at home. Level 3 shares may look cheap, but it is a company that is set to show losses for at least another 24 months. Last year it lost $601 million. It has cash in the bank of $584 million and debts of $7.84 billion. Compare these numbers to those of rival CenturyLink Inc (CTL). It made a profit of $2.03 per share last year, has a dividend yield of 8.70% and has cash in the bank of over $2.5 billion. CenturyLink is a far better buy than Level 3 Communications.
8x8 Inc (EGHT): Shares are trading around $4.50 at the time of writing, as against their 52-week trading range of $2.12 to $5.44. At the current market price, the company is capitalized at $278 million. Earnings per share for the last fiscal year were $0.11.
Net income looks set to double at 8x8, as the company seeks to cut costs and enter into agreements to use its automated virtual switchboard and internet services. Its operating margins should benefit from increased take up, and move closer to AT&T’s (T) 15.5% from its current 9.76%. Year on year quarterly revenue growth of 9.9% exceeds that of rival Vonage (VG) – depreciating by more than 3% - which made a loss per share of $0.24 last year. All this taken into consideration, 8x8 shares are fairly valued given their price to earnings multiple of 40.45. Hold.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.