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While playing it safe can produce slow but steady returns, especially if one is investing in stocks with dividend payments, the home runs are hit by speculating. Sure the odds are high, but if the odds were not high, everyone would be making a killing. The adage 'no pain, no gain' comes to mind. Having said the stocks covered in this series are only for those investors who are willing to speculate; if you are looking for safety then these plays are definitely not for you.

Investors who do not want to speculate would be better of putting the money into plays such as Applied Materials Inc (AMAT) and Microsoft Corporation (MSFT) which have yields of 3.00% and 2.7% respectively. Applied Materials has been paying dividends since 2005, has a five-year dividend growth rate of 11.89%, a five-year dividend average rate of 2.10, a total return of 8% for the past 3 years and operating margins of 22.4%. Net Income for Applied Materials has experienced a dramatic growth in the past 3 years. In 2008, it was negative $305 million, in 2009 it soared to $938 million and in 2010 it surged to $1.92 billion. Microsoft has a yield of 3.1%, increased dividends for five years in a row, has a manageable payout ratio of 24%, a five-year dividend growth average of 13.09%, a five-year dividend yield average of 2.00% and a total return of 40.81% for the past three years. Intel (INTC) and Microsoft would receive a total of 3.5 stars out of a possible five. Microsoft net income continues to surge upwards. In 2008, net income was $14.5 billion, in 2009 it was $18.7 billion and in 2010 it jumped to $23.15 billion. Traders seeking higher yields but who are also open to more risk might find some ideas in the following article Pipeline Stocks With Superb Yields Part III

The following five stocks are among the worst performing stocks in the market. From a conventional sense, it makes no sense to invest in them. One has to take the contrarian perspective which states that one should invest in sectors/stocks that are being shunned and avoided by the public. Given that these stocks have taken a severe bashing, one could state that maybe just maybe the worst news is already priced in and there is a fairly decent chance that they could experience some sort of relief rally.

These are not stocks one holds for the long run. Instead, one should set price targets for each play and bail out as soon as they are hit. We will issue price targets and stops; stops are essential when it comes to opening up speculative positions.

Stock

Market Cap

EBITDA (ttm)

Operating

Margin

Quarterly revenue growth

Revenue

Cash flow

ARL

18.28M

35.9M

4.75%

6.7%

160M

-42M

BIOF

46M

25.93M

0.66%

41.7%

630M

15M

PBIB

24M

----

29.28%

-53%

22.4M

30.85M

CDTI

19M

-7.01M

-18.58%

-10.8%

48M

-9.92

DEXO

73M

560.2M

23.95%

38.9%

1.49B

412M

American Realty Investors, Inc (ARL)

American Realty has a price/sales value of 0.11, a quarterly revenue growth (yoy) of 6.7%, and a total return of -81% for the past three years. It has a levered free cash flow rate of -$22 million.

While gross profit has not changed much in the 3 years, net income has taken a beating.

Net income for the past 3 years is as follows; $22 million in 2008, -$70 million in 2009, and -$94 million 2010. For 2011 net income so far stands at $5.5 million. This can be viewed as a small positive development compared to the $94 million it lost in 2010.

Another small positive is that it is trading below book roughly $4.50 below book value.

It has relatively decent support in the $1.10-$1.20 ranges. As long as it does not close below $1.15 on a weekly basis, the outlook will remain neutral. A weekly close above $2.00 should lead to a test of the $3.00-$3.50 ranges; if these targets are hit, I would close the position out. Positions could be opened on a pullback to the $1.30-$1.35 ranges. A stop should be placed at 99 cents.

  • ROE --76.00%

  • Return on assets 0.31

  • Book value $5.38

  • Diluted EPS (ttm):-4.97

  • 200 day moving average $2.07

  • Total return last 3 years -82%

  • Total return last 5 year -81%

BioFuel Energy Corp (BIOF)

BioFuel has a price/sales value of 0.09, a strong quarterly revenue growth (yoy) of 41%, and a total return of 48% for the past three years.

Net income for the past 3 years is as follows; -$40 million in 2008, -$13 million 2009, and- $19 million in 2010. For the first two quarters in 2011 net income was negative also at $7.6 and $7.4 million respectively. However, net income turned positive to $2.19 million for the last quarter ending on Sept 30, 2011.

Developments which could be construed as mildly positive

Positive levered and operating cash flow rates of $20.67 million and $15.7 million respectively. A strong quarterly revenue growth rate (yoy) of 41% and it’s trading almost 45% below book value. The current price is 47 cents, and book value is 88 cents.

It has strong support in the 35-40 cent ranges, and as long as it does not close below 40 cents on a weekly basis the picture will remain bullish. A test and then a rebound from the 40 cent ranges should lead to a test of the old highs ($1-$1.20 ranges). A good place to open positions would be at 40 cents or better. Place a stop at 30 cents.

  • ROE -21.15%

  • Return on assets -0.82

  • Book value $0.88

  • Diluted EPS (ttm):- 0.18

  • 200 day moving average $ 0.42

  • Total return last 3 years 48%

  • Total return last 5 year N/A

Porter Bancorp Inc (PBIB)

Porter Bancorp has a price/sales value of 1.12, a quarterly revenue growth (yoy) of -53%, and a total return of -76% for the past three years.

Net income for the past 3 years is as follows; $14 million in 2008, $11 million 2009, and -$ 4.3 million in 2010.

Developments which could be construed as mildly positive.

Porter Bancorp is trading significantly below book value. It is currently trading at $2.05 and book value is $8.64; a discount of almost 76%. Insiders have a lofty stake of 59.5% in the company, and the short ratio is rather low.

It has strong support at $2.00 and should not close below this level on a weekly basis. If it closes below $2.00 on a weekly basis, it will signal that PBIB is most likely going to put in a series of new lows before a bottom takes hold. A weekly close above $3 should lead to a test of the $4.00-$4.50 ranges. A good point of entry would be in the $1.95-$2.05 ranges. A stop should be placed at $1.70.

  • ROE -35.27%

  • Return on assets -3.5%

  • Book value $8.64

  • Diluted EPS (ttm):- 5.09

  • 200 day moving average $ 3.84

  • Total return last 3 years -76%

  • Total return last 5 year -74%

Clean Diesel Technologies Inc. (CDTI)

Clean Diesel has a price/sales value of 0.4, a quarterly revenue growth (yoy) of -10.8%, and a total return of -81% for the past three years. It has a levered free cash flow rate of -$22 million.

Net income for the past 3 years is as follows; -$9.3 million in 2008,-$7.9 million in 2009, and $8.3 million in 2010. For 2011, net income so far stands at $5.5 million.

Developments which could be construed as mildly positive.

Clean Diesel is trading almost a book value, which suggests its reaching its downside threshold.

It has strong support in the $1.80-.$2.00 ranges. A weekly close above $4.00 will turn the outlook bullish and should result in a test of the $6.00-$6.90 ranges. A good place to open up positions would be on a test of the $2.00-$2.20 ranges. Place a stop at $1.45.

  • ROE -- -181.91%

  • Return on assets -18.3%

  • Book value $2.76

  • Diluted EPS (ttm):- 5.09

  • 200 day moving average $4.18

  • Total return last 3 years 11.7%

  • Total return last 5 year -65%

Dex One Corporation (DEXO)

Dex One has a price/sales value of 0.5, a quarterly revenue growth (yoy) of 38.7% and a total return of -82% for the past 12 months. It has a levered free cash flow rate of $265 million.

Net income for the past 3 years is as follows; -$2.3 billion in 2008, -$6.4 billion 2009, and $5.9 billion in 2010. Net income turned positive in 2010 and this should be viewed as a small positive development compared to the $2.3 billion and $6.4 billion losses in 2008 and 2009, respectively.

Developments which could be construed as mildly positive

A decent quarterly growth rate of (yoy) of 38.9%, a positive levered free cash flow of $265 million, and net income turning positive for 2010 as opposed to the losses of 2008 and 2009. Short percentage of float is 15.4%, which makes it a potential candidate for a short squeeze.

It managed to break past former resistance level of $1, and this former zone of resistance has now turned into support. As long as it does not trade below $1 on a weekly basis, the outlook will remain bullish. A weekly close above $2 should lead to a quick test of the $3.00-$3.30 ranges. Positions could be opened on a pullback to the $1.10-$1.25 ranges. Place a stop at 75 cents.

  • ROE --76.00%

  • Return on assets -195.56%

  • Book value $0.13

  • Diluted EPS (ttm):- 10.88

  • 200 day moving average $1.47

  • Total return last 12 months -89%

  • Total return last 5 year N/A

Conclusion

These are high-risk plays and only investors who are willing to speculate should consider deploying money into them. Traders should use their Las Vegas money on these plays; instead of potentially losing it in five seconds, potentially you have the chance to look in some lucrative gains. Our two favorite plays on the list are PBIB and BIOF. Both have cash flow rates of $15 million and $30.8 million. PBIB is also trading over 75% below book, and insiders have a lofty 59% stake in the company. BIOF is trading over 45% below book value, has a positive levered cash flow rate of $20.67 million, and a total return for the past three years of 48%; one of the few companies with a positive 3 year return.

Disclaimer: This list of stocks is meant to serve as a starting point. Please do not treat this as a buying list. It is very important that you check the finer details in each of the mentioned plays before investing any capital in them. Some investors are happy with taking enormous amounts of risks, while others are bothered by the slightest degree risk; it is imperative that you do your due diligence and then determine if any of the above plays meet with your risk tolerance levels. The Latin maxim caveat emptor applies-let the buyer beware.

Source: 5 Contrarian Speculative Stock Plays