These Cheap Stocks Below $5 Are Poised For Significant Upside

| About: Warren Resources, (WRES)
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I tend to avoid large cap stocks unless I plan to hold the position for a long time. For trading and shorter-term investments, the upside that low priced stocks offer can be far more rewarding and that is why I tend to focus on this sector. Stocks that trade for less than $5 can offer more risk and reward but the risk can be mitigated by buying into companies with solid balance sheets, and in some cases even turnaround potential. Stocks that trade below $5 are often under-followed and that also can create excellent buying opportunities, especially after a market pullback. Furthermore, it's going to be a very long time before a huge company like Exxon (NYSE:XOM) could see its stock double, but smaller companies can see significant gains in what is a very short amount of time, in certain cases. With this in mind, below are a couple of stocks that appear undervalued and are even expected to double, according to analysts:

Warren Resources, Inc. (NASDAQ:WRES) shares have pulled back with the market but this could be an excellent buying opportunity as analysts believe the stock could nearly double from a current $2.60 to $5. Warren Resources is a oil and gas company with exploration and production projects in Wyoming, California, Texas, North Dakota, and New Mexico. It also has developed coalbed methane natural gas in the Rocky Mountain region. The potential from the projects Warren Resources has in the Greater Green River Basin in southwestern Wyoming is promising since this is a resource rich area. Some industry analysis concludes that the Green River Formation is estimated to have around 750 billion barrels of recoverable oil.

As of March 31, 2013, the company owns oil and natural gas leasehold interests in approximately 114,740 gross, or 89,000 net acres. Since approximately 85% of these acres are undeveloped, there is major potential upside as the company taps into this opportunity. The growth potential and significant reserve base could also make this company an attractive acquisition target which could be an added bonus for shareholders.

The shares of this company have dipped with the markets, and this provides investors with an ideal buying opportunity. While it may have some risks that are typical with exploration and production firms, these risks appear relatively low due to the fact that the company is profitable, and because it uses state-of-the-art technology in drilling. It also has meaningful insider and institutional ownership:

Unlike many smaller exploration and production companies, Warren Resources is actually profitable and this greatly reduces risks for investors. Analysts expect the company to earn 30 cents per share in 2013 and 32 cents for 2014. Those are consensus estimates but some estimates are even as high as 53 cents per share for 2014. With the stock trading at just $2.60 per share, this implies a price to earnings ratio at just about 8.5 times earnings which is significantly below the average multiple for the S&P 500 Index (NYSEARCA:SPY) which is around 16 times earnings. Based on earnings, this stock appears undervalued, however, it also appears cheap based on the fact that it trades below book value which is $2.72 per share. The average stock trades for about twice book value.

Warren Resources is using state-of-the-art technology to assess and develop the potential of its reserves. This allows the company to drill with optimal placement which minimizes the coning of water, maximizes the oil production and economic longevity of each well. The company owns a fully enclosed, soundproofed drilling rig that is easy to transport from well to well on a cushion of air. The sound proofing allows for around-the-clock drilling, which eliminates down time and reduces expenses. Furthermore, its wells are constantly monitored by a computer system that enhances run times and profitability.

The use of the latest technology allows Warren Resources to avoid expensive guesswork that used to be a significant risk factor for many smaller oil companies and this greatly reduces downside for investors. It also helps to maximize the reserve base as this company has been able to tap potential from areas that were previously thought to be of little economic value. This use of technology will help to unlock the substantial reserves and enhance production results. In the latest 10-K filing, the company estimated proved reserves was about 15.3 million barrels, with average daily production of around 12,000 barrels of oil equivalent per day.

Insiders and institutions appear bullish on the stock. Some top company executives added to their positions by buying more stock this year. For example, On March 13, 2013, Arthur Epstein (an officer) purchased 10,000 shares and he now holds nearly 1.4 million shares. Norman Swanton, (an officer), also has a significant stake with about 1.45 million shares. A number of top hedge funds and mutual funds also have been acquiring shares and now hold a major stake. For example, BlackRock Institutional Trust Company, reportedly owns about 4.6 million shares which is more than 6% of the company. Manulife Asset Management, LLC owns nearly 10 million shares which is about 14% of the entire company. (This position alone is worth well over $30 million.) When company insiders have a meaningful stake, it helps to ensure that executives are aligned with shareholder interests. Furthermore, when sophisticated institutional investors are buying significant stakes, it can also be a signal for smaller investors to follow in and buy what appears to be a very undervalued and high-potential stock.

Earlier this year, analysts at Sidoti & Company LLC announced a buy rating and set a $5 price target. Sidoti specializes in equity research with small capitalization companies. With the market pullback, shares are trading at the $2.60 level now, so it makes sense to consider the stock, especially when it could potentially double.

Advanced Micro Devices, Inc. (NASDAQ:AMD) shares cratered towards the end of 2012, but more recently investors are taking a fresh look at the stock. Even with a recent rally from about $2.50 in May to a current $4 per share, there could be a lot more upside to come. In fact, one top investor thinks the shares could go back to $8, which would give shareholders a potential double from current levels.

There certainly are a number of challenges and risks for the company and investors. Tech companies can be rendered obsolete in short order when and if another company comes out with a better product and that could be one of the biggest risks to consider, since it happens so often. However, buying beaten down shares of still viable companies that are poised for a turnaround can also be immensely rewarding. That could be the case with AMD.

Even as some investors focused on concerns that Intel (NASDAQ:INTC) and other competitors would eat AMD's lunch, the company has been working on plans to increase revenues and profits substantially. Just over a year ago, AMD bought a company called "SeaMicro" which has promising new technology that could allow it to compete in the server market which is currently dominated by Intel (with a 96% share of the market). This could start to add significant revenues for AMD in 2014. One investor sees this as a game-changer for the company and a recent Barron' article details the bullish outlook, it states:

This time could be different. SeaMicro's technology looks good; its management team, astute; and the market opportunities, promising. One newly converted bull, Dan Niles, who bought AMD this year after being negative on its prospects last year, thinks the shares could go to over $8. Niles, who works at AlphaOne Capital Partners, sees this happening if AMD's revenue grows to $7 billion by 2015, and if its stock multiple of enterprise value to trailing 12-month sales rises from 0.7 times now to 1.3 times, which would bring it closer to Intel's 2.2. He considers this very possible.

AMD is also looking to take market share in graphics chip and this could provide additional revenue and profit growth. In this article, Ashraf Eassa details how AMD is likely to become more competitive in this higher profit margin segment of the industry and challenge companies like Nvidia (NASDAQ:NVDA). AMD also recently announced a deal to provide chips for the new PlayStation 4 game console and the next-generation Xbox from Microsoft (NASDAQ:MSFT).

In the past few months, AMD has also moved to lower expenses which could further position the company for improved financial results. Even with all these positive developments, it's important to note that risks remain, especially since the company has posted losses and is expected to continue doing so for now. Consensus estimates call for losses of 25 cents per share in 2013 and for a small profit of just 4 cents per share in 2014. When conditions are right, AMD has earned enough on a per share basis to warrant a much higher stock price. For example, AMD earned 67 cents per share in 2011 and 64 cents in 2010. That shows the kind of earnings power this company could have again in the future.

Companies that are posting losses are generally higher-risk investments and a real turnaround appears to be a ways off. However, it also looks like the worst could be over for AMD shares and with the new products described above likely to boost revenues in the next year, it's easy to see why this stock could potentially double from current levels. Dan Niles is not the only bull, analysts at Well Fargo (NYSE:WFC) also see major upside and have set a $7 price target based on AMD's latest "Richland" processors and restructuring benefits.

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

Disclosure: I am long WRES. 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.

Additional disclosure: I plan to continue adding to my WRES position and I may buy AMD shares soon as well.