3 Stocks Trading Below $7 That Could Be Poised To Double

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Includes: ANRZQ, TOF, ZNGA
by: Trade In Mexico

Smaller capitalization stocks often carry higher risk, but can also offer much higher rewards. For example, it could take many years for a major company like Exxon (NYSE:XOM) to see the share price double in value. To further illustrate this point, consider that Exxon shares were trading around $85 in 2008, and today it's right around that level. Even if you had bought Exxon at the financial crisis lows which was around $57 in June, 2010, you still would not have doubled your money. Part of this is because huge companies that have widely followed stocks are less likely to get "overlooked" and that means the market often is usually more efficient at pricing these stocks at fair value. The other reason large capitalization stocks are not as likely to double is because it takes so much more to move the needle with major companies. It would be hard for Exxon to find a new source of revenue or acquisition target that could significantly boost the stock price, due to sheer size. It all comes down to the law of large numbers.

As an example of how smaller company stocks can make huge moves in a short time, just look at Smart Balance, Inc. (SMBL), a maker of specialty foods, whose stock price doubled in a matter of weeks going from about $5.50 per share to nearly $12. This occurred after the company announced it would acquire Udi's, which is a maker of gluten-free foods, in a deal valued at about $125 million. While Exxon could be a great stock for stability and dividend income, it might be more exciting and possibly more profitable to own low-priced stocks that have potential for spectacular gains. Here are some relatively smaller companies, with low-priced stocks below $7 per share, that could be poised to double:

Alpha Natural Resources (ANR) shares have plunged in 2012, from about $17 in April, to a recent 52-week low of just $5.28 per share. Many major coal companies have been impacted by a drop in coal pricing and demand. The slowing economy in China and other countries has caused a reduction in demand, and very low natural gas prices have caused some utilities to switch from coal to natural gas in order to generate power with lower costs. However, many coal producers have responded to falling demand by cutting coal production. This could lead to a more balanced supply and demand situation in the coming quarters, and this might allow coal prices to stabilize, if not rise. Also, the coal industry recently received positive news when a U.S. court ruled against proposals by the Environmental Protection Agency to limit pollution from coal-fired power plants. Although, the EPA is reviewing that decision, which could mean it is not a closed case. This stock appears to be a bargain at current levels and it trades for a fraction of the book value, which is $23.04 per share.

Why Alpha Natural Resources could double: In the past week, this stock has seen a sharp rebound from what looks to be very oversold levels and it could continue to rise. On August 10, 2012, analysts at Dahlman Rose reiterated a buy rating and set a $13 price target for this stock. That would provide a near double for investors buying at recent levels.

Key Data Points For Alpha Natural Resources From Yahoo Finance:
Current price: $6.87
52-Week Range: $5.28 to $30.66
Dividend: none
2012 Earnings Estimate: a loss of $1.40 per share
2013 Earnings Estimate: a loss of $1.60 per share

Zynga, Inc. (NASDAQ:ZNGA) is known for developing some of the most popular online and mobile device games with hits such as "Farmville" and "Mafia Wars." This company went public in late 2011, and even though it was a popular IPO, the shares have been plunging over concerns about growth and other issues in recent weeks. It probably did not help that the Facebook (NASDAQ:FB) IPO also did not go as well as some investors planned, since Zynga depends on many Facebook users for revenues, and remains associated with the company. Another issue has been the fact that a number of top-level employees have left Zynga in recent weeks, possibly because the stock price is so low that it's no longer a big incentive to stay "on-board." Just days ago, the Chief Marketing Officer, Jeff Karp, resigned from the company and in August, the Chief Operating Officer, John Schappert also left. However, there are some positives that investors might be overlooking. For example, this company recently announced plans to build a social network for gamers, which is called "Zynga with Friends." This could make it less dependent on Facebook. Zynga also has a huge cash horde with about $1.22 billion in cash and just around $100 million in debt. The cash on the balance sheet is equivalent to roughly $1.60 per share, which is considerable for a stock trading at just around $3 per share.

Why Zynga shares could double: Just recently, analysts at Canaccord Genuity set a $6 price target on Zynga shares. With the stock trading around $3, that would provide investors with a double. With the valuation this low, it could see a buyout offer. However, with many shareholders losing money on this stock, it could see heavy tax-loss selling in the fourth quarter, so in the absence of some really good news like a buyout, the stock could remain under pressure for months. The best buying opportunity might be to wait for tax loss selling to peak in November and December and then buy and wait for big gains that could come in January when tax-loss selling has ended.

Key Data Points For Zynga, Inc. From Yahoo Finance:
Current price: $2.96
52-Week Range: $2.66 to $15.91
Dividend: none
2012 Earnings Estimate: 7 cents per share
2013 Earnings Estimate: 11 cents per share

Tofutti Brands, Inc. (NYSEMKT:TOF) is not a well-known company but investors might be familiar with its product line which is carried at Whole Foods (NASDAQ:WFM), and many other grocery retailers. This company is focused on developing and marketing specialty foods, particularly dairy-free products, which include ice cream, sour cream, cheese, chocolate chip cookies, pizzas, etc. One of the most popular items this company makes is called "Tofutti Cuties", which are dairy-free ice cream sandwiches. Consumers who are lactose intolerant, or who are trying to reduce cholesterol levels are particularly well-suited for dairy-free products. Just recently the CEO, David Mintz said the company was poised to "take-off" in a video interview on TheStreet.com. That could be based on the fact that the company has recently raised prices, which could boost margins, and because of the development of new products.

Why Tofutti shares could double: There are huge valuations being given to companies that offer health and specialty foods. Just look at companies like Whole Foods trading at about 43 times earnings, or Annie's (BNNY), which trades for about 60 times earnings. Annie's has annual revenues of about $147 million and a market capitalization of around $783 million, that puts the sales-to-market-capitalization ratio at about 5. If Tofutti was able to generate a similar sales-to-market-cap ratio, the stock could trade for about $14 per share. I would not count on that, but it seems clear that the stock realistically has potential upside of more than double the current price. Especially if management takes cues from some of the companies that are getting the buyout offers and huge market valuations. The other possibility is a possible takeover by a larger company or a private equity firm that sees the value in Tofutti's dairy-free formulas and the growth potential it has, if it was expanded. A company like Dean Foods (NYSE:DF) that makes a number of dairy and dairy-like products such as "Silk" brand soy milk, could find companies like Tofutti to be an interesting acquisition target.

Key Data Points For Tofutti Brands, Inc. From Yahoo Finance:
Current price: $1.64
52-Week Range: $1.34 to $2.55
Dividend: none
2012 Earnings Estimate: not available on Yahoo Finance
2013 Earnings Estimate: not available on Yahoo Finance

Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ANR, TOF over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.