2 Stocks Under $9 Set To Double

by: Larry Meyers

There’s nothing better for an investor than when the market discounts a stock for no good reason. When market inefficiencies like this take hold, it creates great opportunities for savvy investors ready to pounce. Two stocks popped up on my radar recently that have the potential to double in the near term.

The first is Ashford Hospitality Trust (ASHT). The company is a hotel REIT that owns over 100 hotels across numerous brands and states. Ashford is exceptionally well-managed. During the financial crisis, when the travel and leisure industry faced unprecedented declines in revenue, most of Ashford’s competitors struggled with lack of liquidity and lack of credit availability. They all cut their common dividends and most cut their preferred dividends. Many were on the verge of bankruptcy. Ashford survived totally intact, never cut their preferred dividends, and repurchased enormous amounts of both their common and preferred shares.

The market has apparently reacted with great fear at the prospect of a double-dip recession. Marriott (NYSE:MAR) stock is down 20% from its July high, Starwood Hotels and Resorts (HOT) is down 28%, Sunstone Hotels (NYSE:SHO) is down 45%, and Strategic Hotels and Resorts (NYSE:BEE) is down 40%. Ashford is down almost 50%.

Whereas these competitors purchase hotels at a price per key of $320 from 2009 to the present, Ashford’s purchase of several hotels known as the Highland Transaction, was done at half that price. Ashford’s YOY margin changes have consistently outperformed its peers. In 2007, margins improved 114 bps vs. peer change of 78; 2008: -58 vs. -106; 2009: -406 vs. -487; 2010: 86 vs. 53, and YTD: 229 vs. 141. Ashford blows away these same competitors, as you can see from a recent investor presentation.

Meanwhile, Ashford’s TTM AFFO per share is projected to be up over 43% since 2007 vs. all the peers, which will be down a whopping 71%. As for liquidity, Ashford has $229 million vs. Marriott’s $117 million, Starwood’s $1 billion, Sunstone’s $206 million, and Strategic’s $114 million.

There is no reason for the sector to have been hit like this, and with Ashford down 50% from its high, I see it returning to those levels inside of 12 months.

The other stock is DGSE Companies, Inc. (DGSI) This little company had been a jewelry sales operation for many years that traded bullion on the side. In a recent quasi-reverse merger, it acquired Southern Bullion Trading from privately held NTR Metals. The company offers a gold play without gold’s volatility. The company current trades around $8, however, my estimates are for 30% annualized growth. The company recently announced that the purchase of Southern Bullion turned out to offer more revenue and profit then they expected, so even my estimates may be low. As it is, DGSE is undervalued compared to its closest peers, the gold miners. The Market Vectors Gold Miners ETF (NYSEARCA:GDX) trades at a P/E of 15, Newmont Mining (NYSE:NEM) is at 13.9x, Barrick Gold (NYSE:ABX) is at 13.2x, Kinross Gold (NYSE:KGC) trades at 18x, Goldcorp (NYSE:GG) is at 21x, and El Dorado Gold (NYSE:EGO) trades at 31x. The average of these six securities is a 19 P/E, suggesting DGSE is 27% undervalued with a P/E of 14.

I see DGSE doubling within a year as the companies consolidate their balance sheets, the stock becomes increasingly liquid, and analysts begin to follow the stock, giving it more visibility.

Disclosure: I am long AHT, DGSE.