I love cheap stocks. Admitting it is the first step, you know. They may not have the glitz and glamour of high flying Wall Street darlings, but I feel a level of comfort in knowing that my downside risk is limited. For me, investing is all about finding asymmetric opportunities. By that, I mean I'm looking for trades that are levered in my favor. I want stocks that give me lots of upside potential with limited downside risk. If I'm buying a $2 stock, in a worst-case scenario I want it at $1.50 if my investment thesis fails. Best case, I want it at $5+. Finding those opportunities can be rare, but they are out there (as you will see shortly). Most cheap stocks are cheap for a reason and you have to have a good eye to separate the wheat from the chaff. Investing in these companies takes discipline because this whole game is one big long shot, and if you don't have the control to stay away from the gambles, or the fliers, or whatever else you want to call a stupid move then, my friends, I'm sorry to say one day you will go down. It's inevitable.
When sifting through the bargain-bin, I personally like to look at a combination of cash flow, book value, current ratio, EBITDA, and debt. One also has to consider macro factors and the nature of cyclical industries, if applicable. Let's take a look at a few stocks that could be ready for some nice upward movement.
LML Payment Systems (LMLP)
LML provides payment processing solutions primarily to businesses and organizations that use the internet to receive or send payments in Canada and the United States. The company recently finished a multi-year campaign to enforce their intellectual property rights from several leading commercial banks and now sits with over $30M in the bank, $1.07 per share in cash, and no debt. The real story with this company is their wholly-owned operating subsidiary, Beanstream Internet Commerce. LML recently reported 4th quarter results to the tune of $10.7M in revenue and $0.09 EPS. Beanstream's growth was quite impressive at over 28% with the addition of over 3,000 customers in fiscal 2012. Beanstream recently became a player in the rapidly growing mobile payment industry with the introduction of a mobile card reader designed to fit iPhone, iPad, and Android enabled devices. Beanstream was also mentioned as a technology partner in Mastercard's (MA) new mobile payment venture, Paypass Wallet Services.
LML's book value now sits at roughly $1.82 per share. Earnings and revenue from the core business continue to increase at a rapid pace. Frankly, it is hard to see how this stock is trading below $3 a share, let alone $2. Net of cash, LML's market cap is roughly $20M, quite shocking when you consider the profitability and huge growth prospects. Comparatively, Planet Payment's (PLPM) market cap is around $200M. What do you get for that $200M market cap you might ask? Slightly more revenue than LML, less profitability, and less growth. Planet Payment currently trades at a trailing P/E of 100 and trades at 11x book value. The industry average P/E is 20 and most payment processors trade between 3-5x book value.
LML's client base is well diversified and stands to turn a profit in almost any macro environment. It is hard to see how the stock can be trading near book value and should probably be trading at double it. I also feel LML is an attractive acquisition target given the rapid expansion in the mobile payment industry and their strong foothold in the Canadian market. This is by far my favorite stock in the grouping.
On first glance, I'll admit I almost passed on this stock. After reading their 3rd quarter report and doing more research, my opinion changed. ASTC reported EPS of $0.05 in Q3 on revenue of $10.0M, compared with $5.7M and a net loss of $(0.02) a year earlier. As of March 31st, the company's rolling backlog was $34.8M.
Astrotech operates in three main business units: Astrotech Space Operations, Astrogenetix, and 1st Detect.
Astrotech Space Operations (ASO) is the leading commercial supplier of satellite launch processing services in the United States. ASO provides all support necessary for their governmental and commercial customers to process complex communication, Earth observation and deep space satellites successfully in preparation for their launch. This particular segment immediately peaked my interest after Elon Musk's (the founder of PayPal) SpaceX Dragon became the first commercial vehicle in history to attach to the International Space Station. Astrotech must have also thought this was a major development as they put out a press release congratulating Space X on their success. Commercial space flight could be the next frontier and ASO is in a prime position to profit.
Astrogenetix is currently in the process of developing vaccine candidates in microgravity, with a focus on Salmonella and methicillin-resistant Staphylococcus aureus (MRSA). A news report from April that sounds very similar to Astrogenetix's method of testing indicates a vaccine is almost ready to go to FDA trial.
1st Detect was formed to commercialize miniature-mass spectrometer technology first developed for the International Space Station. 1st Detect offers the Miniature Chemical Detector, a breakthrough device in the mass spectrometer market that fills a niche by being highly accurate, lightweight, battery-powered, durable and inexpensive. The 1st Detect ion trap based design is roughly the size of a shoe box, weighs approximately 12 pounds, and only requires 12-volt battery power. Additionally, the Miniature Chemical Detector provides rapid substance reading, capable of detecting residues and vapors from explosives, chemical warfare agents, toxic chemicals, food and beverage contamination, illicit drugs and pollution.
ASTC currently trades well below its book value of $1.84 per share and the company is currently valued at only $11M, net of cash. The ASO segment will continue to provide solid revenue for the foreseeable future and could really see explosive growth if commercial space flight becomes mainstream. Astrogenetix is more of a wild-card, but could provide a lottery ticket if their vaccine is accepted by the FDA. 1st Detect seems to have a product that could revolutionize the mass-spectrometry market and I wouldn't be surprised to see the TSA using this product in every airport in the country within the next few years.
Metalico is a Ferrous and Non-Ferrous scrap metal processor operating in New York, New Jersey, Pennsylvania, Ohio, West Virginia, Texas and Mississippi. Metalico, through its Mayco Industries division, is the nation's largest fabricator of lead based products, other than batteries. Obviously, the steel industry has been having a tough go of it lately, principally due to lower demand out of China and Europe, and MEA has been absolutely crushed over the last few months going from $5 in March to now trading in the low 2's. Analyst estimates have come down, but are still at the point where the stock looks attractive. Trading at just under a 6 forward P/E and sporting a book value of $4.09, it is likely MEA has already seen the worst of the selling.
MEA is currently only trading slightly above 2008/2009 prices when it looked like the world was heading for global depression. Prices for scrap and other base metals are down, but they're nowhere near 2008 prices. Even companies like Schnitzer Steel (SCHN), which is mostly a steel manufacturer, is trading at a 10 forward P/E. SCHN is also near 2008/2009 prices despite improved profitability.
It is hard to see MEA trading significantly lower than it is now unless further weakness develops in the world economies. I still see MEA remaining profitable even if further weakness does occur and if scrap prices start to increase, the upside in MEA could be significant.
Conclusion: In my opinion, all of these stocks present compelling risk/reward opportunities and fit into my asymmetric trade requirements. I feel that the market is currently significantly mispricing these businesses, and there is considerable opportunity for appreciation over the next 3-6 months.
*Stock charts from dailyfinance.com
*Financial figures from CapitalIQ
Disclaimer: I am not a financial advisor. You should consult your own financial planner before acting on recommendations to consider its suitability for your investment circumstances.