6 Dirt Cheap Stocks the Smart Money Is Buying

by: Rougemont

The stocks below are trading at bargain levels for various reasons ranging from highly negative sentiment to overblown fear and risk avoidance. The other common theme with all of these companies is that the "smart money" has been buying these stocks at what might be rock bottom prices. "Smart money" is often defined as people in the know, and investors who have been so successful with stock investments that they have become hedge fund managers, billionaires, etc.

These stocks could offer very significant gains if the companies resolve the challenges facing their businesses and therefore remove the negative concerns that have been weighing on their stock price. Many made fortunes shorting Internet stocks just before the bubble burst and after that, fortunes were made buying the right stocks that were "left for dead" at a buck or two, when they rebounded to $30, $50, even over $500 per share. The best example is Priceline (NASDAQ:PCLN), which was "left for dead" and traded for as little as $1.49 per share on January 6, 2003. Today those same shares trade for more than $500! That means an investment in PCLN of about $1,500 in 2003, would be worth over half a million dollars today. While I am not expecting those types of returns in any of these stocks, it does provide motivation to seek out investments that the market might be seriously undervaluing now due to a highly negative bias against a certain company or industry. Here are some dirt cheap stocks that the smart money has been buying:
Mueller Water Products (NYSE:MWA) is trading at $3.67. Mueller Water Products makes and markets water infrastructure, flow control, and piping component systems for use in water distribution and water treatment facilities. These shares have a 52 week range of $2.21 and $4.80. The 50 day moving average is $3.99 and the 200 day moving average is $3.86, so these shares are trading close to support levels. Estimates for MWA are for a loss of 4 cents in 2011, and profits of 18 cents per share in 2012. Book value is stated at $2.60.
Why the "smart money" is investing in MWA: This stock regularly traded for $14 plus before the financial crisis in 2008. There is an enormous amount of water treatment and distribution infrastructure that needs to be upgraded in this country, and that will be a big opportunity for MWA. While many are concerned that budget issues at many municipalities might continue to postpone or cancel water infrastructure projects, sooner or later most of them will have to happen to maintain water quality and system efficiency. When MWA starts reporting growth and profits, the stock is likely to see strong appreciation from these levels. Famed investor David Tepper reported owning a large stake in MWA of nearly 7.5% of the company. David Tepper is known as a billionaire who invests in value stocks as well as distressed companies and he has a very impressive track record.
Tongxin International (OTCPK:TXIC) is trading for about $1.25 per share. This company manufactures vehicle body structures, and has corporate headquarters in Birmingham, Michigan, with manufacturing plants in China. The situation with this company is a little more complicated, and since I have done extensive research, I am going into more detail than I do with the other stocks here. This company had an accounting issue with a related party transaction, which caused it to not report financials on a timely basis. The accounting issue facing this company appears to be completely resolvable and it's for a relatively nominal amount. I also note that there are very few shares short here, which appears to indicate that even shorts don't seem to doubt that this is a real company that will rebound. There are multiple signs that confirm this company has a solid business and that with American management, it is working hard to become compliant with investors and regulations/filings. On November 22, 2010, Tongxin appointed a new CEO, Willam E. Zielke, who was likely appointed to restore investor confidence and shareholder value. According to the presentation, the company has about 11.8 million shares outstanding, it also shows revenues of about $98.4 million for 2008, about $121 million for 2009 and "pre-announced" revenues of about $100 to $110 million for 2010.
This presentation shows four main areas the company is focused on for growth, including exports, and states that "Ford (NYSE:F) is (a) likely candidate to make an initial supplier audit visit." If TXIC were able to secure a major contract to supply Ford, it could add significant upside to the stock. It lists the bios for the management team, which includes the new CEO William Zielke who has 30 plus years of automotive experience. The company auditor is listed as being BDO Seidman LLP, which is a highly respected and well known firm. It also shows stockholders equity at around $83.7 million as of December 31, 2009, which would indicate a book value of over $6 per share. (This is likely to change since the data is not up to date.) View photos of the factory and products.
Why the "smart money" is investing in TXIC: Based on the valuations, recent and repeated efforts being made by new management to expand and reach out to the investment community, I think these shares offer incredible upside. This appears to be a company that is focused on growth and getting back on track with investors. It has recently updated the company website and investor presentation and has made a presentation at a investor conference earlier this year. Also, a few weeks ago, the company announced plans to expand to meet growing customer demand by investing about $5 million.
These are some of the many indicators that lead me to conclude that Tongxin has a solid business with growth potential and it appears that the most likely outcome is for Tongxin to file up-to-date financials in the very near future. There is real demand for the products this company makes and it has been making these products for about 20 years. It is also reasonable to believe that the company would probably not be investing many millions to expand and have the CEO presenting at conferences if it did not have a solid future. I also do not think the CEO would be releasing a new investor presentation that calls for "pre-announced" revenues of about $100 to $110 million for 2010," if those numbers were not accurate. Another huge plus is that some "smart money" is invested in this company. Heartland Value Fund owns about 1 million shares which is about 8% of the company, and Ibis Management, LLC also has a similarly large stake. You can see that and other large investors here.
Heartland and Ibis have the ability to do extensive due diligence and that bodes very positively for the fundamentals here. I believe that as soon as the attorneys and auditors approve the financials, management will release them and that this will happen in the near future. With up-to-date financials, revenue of $100+ million, an estimated book value of more than $6, and earnings power of over $1 per share all support a stock price of $8 to $10 per share, which is where this stock traded for regularly in the past.
The company has risen from the ashes before. TXIC traded for about $8 in 2008, then cratered to about $2 in 2009 due to the financial crisis, then rose again to $9 to $10 range before dropping to current levels. History is likely to repeat here and at current prices, the risk-reward ratio is extremely favorable and likely to provide very strong gains. Do some research on this company and you are likely to agree that the potential rewards are extremely compelling. Tongxin will make a new investor presentation on July 19, at 12 pm during the 2011 Global Hunter Securities Conference in San Francisco, so watch for updates then. Here is the conference info (pdf): This stock has the potential to trade back up to the $8 to $10 per share range in the next 12 months.
MGM Resorts (NYSE:MGM) shares are trading at $14.07. MGM is a leading casino and resort company, based in Las Vegas. The 50-day moving average is $13.81 and the 200-day moving average is $13.51. Earnings estimates for MGM are for a loss of about 57 cents per share in 2011, and a loss of about 26 cents for 2012.
Why the "smart money" is investing in MGM: Famed investor John Paulson has purchased a significant number of shares in MGM and owns about 9% of the company. Paulson has a very impressive track record. In what some have called the greatest trade ever, Paulson famously shorted the housing market and made billions in profits. Many investors are concerned in the short term with the debt load at MGM. In times of inflation, debtors benefit. Debt provides leverage, and the cost to pay back dollars, which lose value over time, benefits borrowers. It is also important to realize that while MGM has a significant amount of debt, the company has incredibly valuable assets to offset this debt. As revenue rebounds, MGM can repay debt and its credit ratings can rise. This has already started to happen. This stock recently fell to about $12 per share, however, it has rebounded nicely off the recent lows, so I would wait for pullbacks before initiating a new position. This stock has the potential to trade for $20 to $25 per share in the next 18 to 24 months.
Federal Signal (NYSE:FSS) is trading around $6.36. Federal Signal makes a variety of products for vehicles such as sirens, aerial platforms, etc., and is based in Illinois. These shares have traded in a range of $4.91 to $7.79 in the last 52 weeks. The 50- day moving average is $6.32 and the 200-day moving average is $6.36. FSS is estimated to earn about 28 cents per share in 2011, and 61 cents in 2012.
Why the "smart money" is investing in FSS: This company pays a 24 cent dividend, which is equivalent to a 4% yield. This pays you to hold the stock while you wait for a higher share price. This stock regularly traded for $14 plus before the financial crisis in 2008. However, investors have been concerned that growth will be hard to come by since many states and municipalities have budget issues. It seems that this might be the case for awhile but eventually FSS customers will have to upgrade used equipment. Heartland Advisers, Inc., reportedly owns about 7.1 million shares, which is about a 11.5% stake in this company. This stock recently fell to about $5.75 per share, however, it has rebounded off the recent lows, so I would wait for pullbacks before initiating a position.
Amylin Pharmaceuticals (AMLN) shares are trading at $13.43. Amylin is a biotechnology company, and is based in California. These shares have a 52 week range of $9.51 and $24.21. The 50-day moving average is $13.04 and the 200-day moving average is $14.02. Earnings estimates for AMLN are for a loss of 89 cents per share for 2011, and 94 cents loss for 2012. The book value is stated at $2.38.
Why the "smart money" is investing in AMLN: These shares fell hard when AMLN announced disappointing results for its obesity drug, which made the shares a bargain at about half off the 52 week high. Hedge fund legend Steven Cohen (founder of SAC Capital) was just reported to have increased his position in AMLN to over 7 million shares. Also, famed investor Carl Icahn of Icahn Capital Management is reported to own about 14 million shares. You can read more about those large ownership positions here: These share have moved up in the past couple days, so I would wait for pullbacks.
Bank of America (NYSE:BAC) shares are trading at $10.39. This banking giant is trading right around 52 week lows. The dividend is 4 cents per share per year, which is a yield of about .3%. BAC shares offer rebound potential, a dividend that is likely to grow, and a low PE ratio. I don't expect big moves in BAC soon, but patient investors are likely to be rewarded for accumulating and waiting.
Why the "smart money" is investing in BAC: The PE ratio is low and the stock is selling for less than book value, this and other factors make this stock a bargain. When you look at BAC, you have to be impressed that given all the strong headwinds and losses from foreclosures, this company has been reporting profits. Eventually, the headwinds and foreclosure/mortgage losses will dissipate and investors will be left with a far more profitable company. A number of smart money investors are invested in BAC including stock legend Bruce Berkowitz. This stock has the potential to trade for $20 to $25 per share in the next 12 to 24 months. However, because BAC stock is showing weakness and the problems will take time to resolve, it only makes sense to buy this in stages over time.

Disclosure: I am long BAC, OTCPK:TXIC. and may buy all the stocks listed soon.

Disclaimer: The data is sourced from Yahoo Finance and Stockcharts.com. The information and data is believed to be accurate, but no guarantees or representations are made. Rougemont is not a registered investment advisor and does not provide specific investment advice. The information contained herein is for informational purposes.

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