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By Chris Seabury

A common strategy that a number of investors will use is to find companies that are quickly growing and have some kind of catalyst to propel the stock higher. As they are just beginning to post a profit or they could be experiencing declining net losses. This is because the firm is rapidly expanding and they are experiencing a positive shift in their business model. Once this takes place, prudent investors can become involved in a company that can help to increase their overall returns dramatically. A good example of this can be seen by looking at Amazon.com (NASDAQ:AMZN) from 2000 to 2003. What was happening is the firm had been continually experiencing declining losses in their earnings. This is because the Internet was fairly new and most people were still making the shift to online purchases. Once this occurred, it meant that the firm’s losses would begin to become smaller with each year. Over the course of time, this helped Amazon to be able to realize an operating profit. As, the earnings per share for the firm would rise from a $-1.19 (in 2000) to $.18 (by 2003). This is significant, because it is showing the profit margins of the firm were rising based on the new business model that they had introduced. In the long term those companies that are able to achieve their objectives will see an increase in their bottom line numbers. To determine possible organizations that are taking similar kinds of approaches requires examining the company itself and the effect that it is having on their business model. Five stocks that are under $10 that fit into this category include: Campus Crest Communities (NYSE:CCG), LSI Corporation (NASDAQ:LSI), ATP Oil & Gas (ATPG), Hecla Mining (NYSE:HL) and Sirius XM Radio (NASDAQ:SIRI).

Campus Crest Communities

Campus Crest Communities is involved in the construction, managing and ownership of student housing communities throughout the United States. Over the past year, the stock has traded between: $8.71 to $14.36. This is because at the beginning of the year, the company has disappointed Wall Street analysts. Then over the last three quarters the firm has beat estimates twice and missed once. This has caused the price of the stock to test the $9.00 range with a double bottom pattern completing in early November at $8.71. Evidence of this can be seen by looking at the earnings for Campus Crest Communities over the past year.

Earnings for Campus Crest Communities

December 2010

March 2011

June 2011

September 2011

Estimate

$.17

$.16

$.16

$.20

Actual Earnings

$.15

$.17

$.17

$.19

These different figures are showing how the unpredictability in earnings has increased the total amounts of volatility in the stock. However, since the middle to the end of November there have been three large insider purchases ranging from: 2,500 to 3,000 shares. This is an indication that several officers at the company (the Executive Vice President, the CEO/Chairman and the CFO) believe that future growth is possible. These elements are important, because they are an indication that company’s earnings could be improving. As the double bottom pattern and the large insider buys are an indication that there could be improved earnings guidance and stability in the future.

LSI Corporation

LSI is involved in the manufacture and sale of semiconductors along with storage solutions. Recently, the firm was named one of the most innovative companies by Thompson Reuters. Over the last year the price of the stock has traded between $3.89 and $7.50. What has been keeping the stock within this range is the earnings have been meeting analysts’ estimates. Yet, these numbers have not been consistently increasing. A good example of this can be seen by looking at the below chart which is showing the volatility in these figures.

Earnings of LSI

December 2010

March 2011

June 2011

September 2011

Estimate

$.13

$.10

$.10

$.14

Actual Earnings

$.14

$.10

$.10

$.14

These numbers are illustrating how the earnings for the company have been somewhat volatile. This is what has been causing the stock to remain in its trading range. However, from a fundamental standpoint the shares are undervalued. As the company has a forward PE ratio of 11.58, they have no debt, $878 million in cash and total revenues of $2.69 billion. This is an indication that the price of the stock will trade higher once there is an improvement in earnings. During the last three quarters this has been taking place (which is indicating that the company could be turning the corner).

ATP Oil & Gas

ATP Oil & Gas is involved the production and exploration of oil along with natural gas in two regions of the world. Most notably: the Gulf of Mexico and the North Sea. In 2008, the company was trading at $50.00 per share. However, since that time they began to take larger than expected losses and prices have traded from $5.53 to $21.40 in the past 52 weeks. A good example of this can be seen by looking at the below table for earnings over the last year.

Earnings of ATP Oil & Gas

December 2010

March 2011

June 2011

September 2011

Estimate

$-26

$-.39

$.-38

$-.54

Actual Earnings

$-3.77

$-2.34

$-1.11

$-.11

These figures are illustrating how the company was experiencing larger than expected loss from the development of new oil and gas fields. However, the underlying trends in the actual numbers are showing how this strategy has been paying off for them. As a result, a massive short squeeze has developed in the stock, with the company saying that earnings are improving. Yet, most investors do not believe that this is going to occur. In the future this means that ATP Oil & Gas could see a sharp increase in stock prices. As, this current trend and positive news are creating the right conditions for the shorts to cover these open positions at the same time.

Hecla Mining

Hecla Mining is involved in the production of gold, silver, zinc and lead. They own / operate several mines in two regions (i.e. Alaska and Idaho). In the last year the price of the stock has been trading between $4.82 and $11.56. This is because the earnings have been somewhat volatile because of the sharp changes in commodities prices. A good example of this can be seen by looking at the below table which is illustrating the actual earnings versus the analysts estimates in the last 52 weeks.

Earnings of Hecla Mining

December 2010

March 2011

June 2011

September 2011

Estimate

$.12

$.13

$.14

$.13

Actual Earnings

$.10

$.15

$.11

$.11

However, from a fundamental standpoint the price of the stock appears to be attractively valued. This is because, the company has a forward PE ratio of 8.83, they $509.23 million in revenues, $413.74 million in cash and $7.58 million in debt. These figures are important because they are showing how the stock has the potential to see significant increases. Once the earnings are consistently rising is when share prices could move higher.

Sirius XM Radio

Sirius XM provides satellite radio services to customers in the United States and Canada. They offer over 135 commercial free channels of music, talk, sports and news. As of late 2011 the firm has 20.19 million subscribers. This has caused the company’s earnings to remain very volatile. The reason why is because, they have to reach certain milestone in their business model to realize significant long term growth. Evidence of this can be seen by looking at the below table which is illustrating the earnings per share for the company over the last year.

Earnings of Sirius XM Radio

December 2010

March 2011

June 2011

September 2011

Earnings

$.00

$.01

$.01

$.01

Actual Estimate

$.02

$.01

$.03

$.02

These figures are important, because the unpredictability in earnings has caused the stock to remain very volatile. Part of the reason for this is the firm has been working to aggressively add subscribers. Where, a total of 30 million customers will help to improve the revenues and operating margins of the firm. At its current rate the company is adding about 10% new subscribers per year. This is significant because if the firm can maintain these levels. The price of the stock will steadily increase through improving earnings and investor confidence within the next three to five years. As a result this is an indication that the Sirius XM could be at a turning point when it comes to total subscriber growth.

Clearly, there are many different ways that investors can increase their overall returns. One possible strategy is to purchase companies that are on the verge of seeing some kind change in their business model. This is when it appears as if the firm could be facing a number of challenges. Yet, there are different factors that could have an impact on their profit margins. As a result all of the companies mentioned above fit into this category in one way or another.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: 5 Stocks Trading Under $10 With Catalysts To Move Higher