4 Small Cap Trading Ideas Under $5

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 |  Includes: CIM, HBAN, HERO, NOK
by: Dividend Kings

For many, investing in small and mid-cap stocks are an ideal strategy for increasing returns. A recent example of this occurred with the strong performance of 15.47% for the Russell 2000 Index during the last quarter. This highlights the benefits of owning this size of company in today's marketplace. Several firms from this category that I will examine include Chimera Investment (NYSE:CIM), Alcatel-Lucent (ALU), Huntington Bancshares (NASDAQ:HBAN) and Hercules Offshore (NASDAQ:HERO). Please Use my analysis as a starting point for additional research before you plunge in.

Chimera Investment

Chimera Investment trades a forward price earnings ratio of 6.13. The balance sheet includes revenues of $614 million, cash of $9.82 million and debt of $6.02 billion. The earnings have been volatile during the last year by declining from $.17 to $.06. This has helped to increase the weakness in the stock with shares trading below the 200 day moving average (which is bearish). Moreover, the volume has decreased and shares have formed some kind of double pattern. The problem going forward is the lack of confidence in the profits of the firm. This has caused shares to trade slightly higher and reverse. The same kind of situation is taking place with the recent rally in the stock to $2.76. Until there is more clarity in the earnings prospects, Chimera Investments will face continuing challenges. This will be fueled by fears surrounding the balance sheet and possible liquidity challenges. As a result, investors should avoid the stock.

Alcatel-Lucent

Alcatel-Lucent trades at a forward price earnings ratio of 5.61. The balance sheet includes revenues of $20.76 billion, $4.76 billion in cash and $5.70 billion in debt. The earnings for the last 52 weeks have been unstable, falling from $.19 to $.02 (see below)

Alcatel-Lucent Earnings per Share

December 2010

March 2011

June 2011

September 2011

Estimate

$0.16

-$0.04

$0.02

$0.06

Actual

$0.19

$0.02

$0.05

$0.12

Click to enlarge

This has caused the price of stock to fall to a new yearly low of $1.67. The negative momentum is bearish, with shares trading below the 200 day moving average. These numbers are illustrating how Alcatel-Lucent is not considered to be a good buy. This is from the inconsistent earnings and inability of management to instill confidence that these numbers are turning around. There are some signs that the stock is becoming oversold with a low valuation, high amounts of revenues and cash in comparison with the debt. This will provide the firm with the ability to withstand changes in the economic environment. As a result, the stock will stay in a narrow trading range that is affected by bearish sentiment and trends. This will occur until there is more clarity about how the company will grow earnings in the future.

Huntington Bancshares

Huntington Bancshares trades at a forward price earnings ratio of 9.79. The balance sheet includes revenues of $2.42 billion, cash of $2.93 billion and debt of $5.48 billion. The earnings for the past year have been steadily rising, going from $.05 to $.16. This has helped to support the stock, with shares trading in a bullish pattern above the 200 day moving average of $5.63. However, the price is testing significant resistance levels of $6.00 (on lighter volume). These numbers are highlighting how the stock is attractive over the medium to long term time frames. This is based on compelling valuations, rising earnings per share and bullish technical patterns. However, in the short term, the stock is overbought- facing strong resistance at $6.00 per share. This means that the price could decline before reversing and moving higher. It is at this point that the revenues of the firm will begin to rise (which will help to improve the balance sheet over the next several quarters).

Hercules Offshore

Hercules Offshore has no forward price earnings ratio. The balance sheet includes $689.89 million in revenues, $127.27 million in cash and $857.77 million in debt. The company has been experiencing negative declining earnings over the past year (see below).

Hercules Offshore Earnings per Share

December 2010

March 2011

June 2011

September 2011

Estimate

-$0.11

-$0.13

-$0.16

-$0.14

Actual

-$0.03

-$0.12

-$0.11

-$0.12

Click to enlarge

This has caused the stock to remain in a bearish pattern trading below the 200 day moving average of $4.55. The volume has been low over the last six months (which is indicating a lack of conviction from buyers). These figures are showing how Hercules Offshore will decline even more. This is based on the fact that the firm has lower amounts of revenues and cash in comparison to the debt. There is no forward price earnings multiple and the company is expecting negative earnings (that are declining). The combination of these factors will place increased amounts of pressure on the stock. If the financial condition of the firm does not improve, there is the potential for increased levels of volatility. This will be fueled by fear that the firm could be facing the possibility of some kind of liquidity crunch. As a result, investors should avoid purchasing the stock until these issues have been resolved. Please note: The analysis of the above companies should be used as a starting point for any kind of further research.

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