Low priced stocks often carry more risk when compared to blue chip stocks that trade at much higher levels, but the rewards of investing in this group can be huge. While a blue chip stock like Exxon (XOM) might be solid and stable investment, it's also likely to be like watching paint dry when it comes to a big move up. A massive company like Exxon is not likely to see a big move in its stock just due to the sheer size of the company, and the stock that trades for more than $90 per share. However, a much smaller and lesser known company, with a low priced stock is much more likely to see a huge move in the share price (both up and down).
Low priced stocks are generally more volatile and smaller companies are more likely to be inefficiently priced. Lower priced and smaller company stocks are also less likely to have significant analyst coverage. Despite the risks, those factors can create a window of opportunity that investors can take advantage of, if they buy beaten-down smaller cap stocks before a potentially sharp rebound. Investors in smaller cap stocks are more likely to find a real bargain that could double or more than double, because stocks like Exxon just don't double overnight. With that in mind, here are a few stocks that might have more risk than owning shares of Exxon, but also could provide extraordinary returns and roughly double or even more. Let's start with my favorite pick for strong short-term gains, and since it is a more complicated biotech stock, I have taken extra time to explain the situation:
Chelsea Therapeutics (CHTP) shares have been on a roller-coaster ride for the past year and it currently trades at the low end of the 52-week range. The stock surged to new highs in December, 2011, (to about $5.74 per share) as investors anticipated that the company was poised to receive FDA approval for "Northera", or ("Droxidopa") a potential treatment for dizziness and falling which often occurs with patients who have Parkinson's Disease. We now know that the FDA wants more data, and that the stock has plunged. However, this has only served to create what might be a potentially huge buying opportunity.
The FDA hurdles have caused delays, but there are many reasons to believe that this drug will eventually be approved. This treatment has been approved and use in Japan for many years. It's worth noting that it already generates about $50 million worth of sales in Japan, and that earlier this year a U.S. advisory panel voted 7 to 4 in favor of approval. If it is eventually approved, the stock price is likely to jump substantially. Phase 3 results could be reported relatively soon which could reignite the stock. That leads to the question of what is the full potential value of this stock in the short to long term.
Now it's going to get interesting because in a shareholder presentation, the company estimated it could potentially generate between $300 to $375 million in annual sales within 3 to 5 years of approval. The average biotech stock currently trades for about 5 times sales. The market capitalization of the company is now about $89 million, and the enterprise value is just about $49 million since it has around $41 million in cash on the balance sheet. That means that after deducting the cash, the market is currently only valuing the company's technology and future potential to be worth about $49 million. That appears way too low for a drug candidate that is already approved in another country and still has a solid chance of being approved in the United States. The high cash balance also means the company has considerable resources to move forward with and potentially achieve FDA approval. Based on the average biotech price to sales ratio of 5 times, and with Chelsea Therapeutics having about 67 million shares, let's take a look at the long-term potential stock price based on 2 levels of revenues:
1. If Chelsea Therapeutics were to achieve just $200 million per year in annual sales with Northera, the company could be potentially worth about $1 billion, or about $15 per share. From current levels of just over $1 per share, that would be the type of gain that keeps investors hunting for the next great biotech stock.
2. If the company were to achieve approval and sales at the high end of the estimated range ($375 million), at 5 times sales the company would have a potential market capitalization of around $1.9 billion, or about $28 per share. Obviously, Northera would have to be approved and achieve these sales levels over time, but, this does show that the stock has extremely strong upside potential from current levels. However, it will take some patience and FDA approval to get a chance at possibly making almost 28 times your money in the next few years.
In the short-term, I believe this stock is poised to make a big move and possibly touch the 200-day moving average which is right around $2.16 per share. A recent article states that this stock looks "ready to break out", and predicts that it could rise to about $2.32 if the volume picks up. Zacks Investment Research has recently set a "strong buy" rating on this stock and analysts at Wedbush have set a $5 price target. Shorts who are hoping that this treatment is not approved could also fuel a major short squeeze rally since about 3.7 million shares are currently short. The risk is if the drug never gets approved, but the downside is limited to $1.35, and the upside appears to be many multiples of that number. For just over a buck this stock could turn into a "lottery ticket" and more than double in the long-run.
Key Data Points For Chelsea Therapeutics From Yahoo Finance:
- Current Share Price: $1.35
- 52-Week Range: $.70 to $5.74
- Dividend: none
- 2012 Earnings Estimate: a loss of 76 cents per share
- 2013 Earnings Estimate: a loss of 60 cents per share
Genworth Financial, Inc. (GNW) is a major financial services company that offers long-term care insurance, mortgage insurance, annuities and other products. This company was once a part of General Electric (GE), but it was spun-off many years ago. The stock price collapsed at the height of the 2008 financial crisis and has since had its share of ups and downs. The company remains challenged by continued losses in the mortgage insurance division. The long-term care insurance business has also been difficult as low interest rates have impacted returns for companies like Genworth. Longer than expected lifespans have also increased costs for many insurance companies. However, there is good reason to believe that these challenges and a low stock price might just be a buying opportunity in disguise.
The real estate market has been improving slowly but surely and this is likely to continue reducing mortgage losses in the coming years. The company could also see improved results in the future as rates rise for long-term care insurance and some companies leave the industry altogether which will reduce competitive pricing pressures. Genworth shares trading for just about 5 times earnings and well below book value which is about $32.15 per share. David Einhorn is a top investor who was reported to be buying shares of Genworth, which is another sign of the upside potential this stock has. Analysts expect earnings to just about double by next year. This stock could roughly also double in value if it just went back to the 52-week highs or if the price to earnings ratio expanded to a market multiple which currently averages about 14 times earnings.
Key Data Points For Genworth From Yahoo Finance:
- Current Share Price: $5.49
- 52-Week Range: $4.06 to $9.68
- Dividend: none
- 2012 Earnings Estimate: 62 cents per share
- 2013 Earnings Estimate: $1.24 per share
Advanced Micro Devices, Inc. (AMD) shares have plunged to 52-week lows due to concerns over the health of the PC industry and weak demand. This company makes semiconductor chips which are used in a variety of electronic products including laptops, desktops and more. While the rising popularity of tablets and mobile devices seem to have put a major dent in PC sales, the stock appears to be at bargain levels for those willing to patiently wait for a potential turnaround. This company has a solid balance sheet with about $1.3 billion in cash and around $2 billion in debt.
Advanced Micro Devices continues to innovate and it has developed the "Trinity" processor which offers increased speed, improved graphics and battery life. It also plans to make more inroads into mobile devices by offering a specialized processor for tablets, called "Tamesh", in the future. While the shares have been crushed in a wave of negative headlines and disappointing earnings, the stock could double from current levels and still only be trading for about half of the 52-week high which is $8.35 per share. In my opinion, this stock is not likely to double anytime soon, but it appears to have that potential in the long-run.
Key Data Points For Advanced Micro Devices From Yahoo Finance:
- Current Share Price: $2.14
- 52-Week Range: $2.03 to $8.35
- Dividend: none
- 2012 Earnings Estimate: a loss of 17 cents per share
- 2013 Earnings Estimate: a loss of 22 cents per share
Boston Scientific Corp. (BSX) is a leading developer, manufacturer and marketer of medical devices. It provides medical solutions with these core business divisions: Cardiology, Cardiac Rhythm Management, Electro-physiology, Peripheral Interventions, Endoscopy, Urology and Women's Health, and Neuro-modulation. It has about 24,000 employees worldwide, 15 manufacturing facilities and a sales force present in about 40 countries.
In some lines of business such as stents, Boston Scientific and Johnson & Johnson (JNJ) have been long-time rivals. Another key point is that Boston Scientific outbid Johnson & Johnson when it acquired Guidant. These factors have led some analysts and investors to believe that Johnson & Johnson might eventually make a takeover bid for Boston Scientific. Earlier this year, it was reported that famed billionaire investor David Tepper, of Appaloosa Management, bought nearly 8 million shares of Boston Scientific, leading one article to speculate if that was a sign that a private equity takeover could make sense.
The medical device industry has some challenges including a proposed tax that could go into effect in January 2013. The tax is part of a number of new taxes that were passed to pay for Obamacare. This one could run about 2.3% of revenues for medical device makers. However, there are already some lawmakers working to repeal the tax as it could unfairly force companies to pay taxes, even when posting losses. A repeal of this law could boost the shares of Boston Scientific, but the biggest gains would come if the company were to be acquired by a company like Johnson & Johnson or a private equity firm. With the stock trading right around book value and for just about 11 times earnings, it is easy to see that the stock could double in value. The average PE ratio for medical device makers is about 27, which implies major upside for Boston Scientific shares, if the stock is valued more in line with the industry averages in the long-term.
Key Data Points For Boston Scientific From Yahoo Finance:
- Current Share Price: $5.10
- 52-Week Range: $4.79 to $6.41
- Dividend: none
- 2012 Earnings Estimate: 41 cents per share
- 2013 Earnings Estimate: 44 cents per share
Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.