3 Low-Priced Sucker Bets To Avoid, Alternatives To Consider

Includes: C, FTR, S, SIRI, T, VZ
by: Rocco Pendola

I set very few goals for myself. I've learned the hard way in that regard. If I don't expect too much from myself, I won't be let down. However, I tend to aim high with the goals that I do set.

Near the top of my list ...

Save the Seeking Alpha audience from the lady of the night-like allure of low-priced stocks and "cheap" option trades.

Thus far, I think I've been somewhat effective.

Case in point. Here's what I said about Frontier Communications (NYSE:FTR) in a January 27th Seeking Alpha article:

I cannot quite understand if any logic exists behind a long play on the falling knife known as FTR. It must be the 16-17% yield, which is a death trap, a suicide rap, you gotta get out while you're young (and not poor).

And, for as far as the eye can see, the stock continues its freefall. Here's a snapshot of the last three months, compared to higher-priced and far more worthy alternatives, AT&T (NYSE:T) and Verizon (NYSE:VZ).

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But, don't just look to the chart. Check Frontier's books. The company sits on about $8 billion in debt. It's somewhat stunning that the bank actually lets Frontier continue to pay a dividend. Expect it to go lower.

Meantime, AT&T has raised its payout 28 years in a row. And, in September of last year, Verizon hiked its dividend for the fifth straight year. But, more importantly, these companies have balance sheets that not only support increasing dividends, but the notion of paying one in the first place.

While I stress myself trying to figure out why anybody in their right mind would go long FTR, I emit smoke from both ears attempting to determine what planet the most ardent Sirius XM (NASDAQ:SIRI) longs hail from. I've actually had several of them email me or comment on an article, pointing out that the stock has not performed all that poorly post-earnings. Granted, it did not plunge below $2.00 right after the report, but give it time. The tortured few who hang on to hope that this thing can ever become much more than a $2.00 trader's stock are probably the same people who do not leave Miami Beach when the hurricane sirens blare.

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Sirius reported on February 9th, before the bell. The stock closed at $2.19 that day. Since then, it has shed nearly 2% to $2.15. And, as usual, it trades in an intraday range that puts many Hawaiian day traders on the beach before the surf comes up.

What's worse is that people still exist to cheer on the inanity. Barrington Research actually has a $3.00 price target on SIRI. That's stunning.

If you read my articles, you know that I am not one to look at a P/E ratio and cry under- or, especially, over-valued. In fact, lofty P/E ratios sometimes make me bullish. If investors allow companies with not only massive revenue growth, but excellent competitive positions in spaces with loads of opportunity to have mid- to high-double-digit P/Es, I am, often, right there with them. Amazon.com (NASDAQ:AMZN) is an excellent example of a company that should have and likely always will have a high P/E relative to most other companies.

There's no way, however, that you can justify a P/E of 54 for SIRI and a forward P/E of 24. And then, sit there with a straight face and call this thing a $3.00 stock on what will be 10% revenue growth, year-over-year, by the end of 2012. And that's being optimistic. But, of course, there's always controversy with Sirius XM. Everybody has a different P/E for the company. FinViz lists it at 30.71. My quick, back of the envelope math (and isn't that really all you need?) puts its at a whopping 71.6.

So, I guess what we can call fairness, let's go with the low ball P/E of 30.71.

Last night I ran a screen for companies with P/Es over 30 and forward P/Es over 20. It returned 337 results. Filter it to only include stocks trading for less than $5.00 and the screen returns 13 results. Chop it down to stocks trading for less than $3.00 and it spits out the following all-star cast of five:

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Draw your own conclusions on the wall...

Sprint (NYSE:S) - It's the new Citibank (NYSE:C). C was a sucker bet that I fell for via the options market a time or two when it traded sub-$5.00. I remember the war cry. It's the same for many of these below $5.00 jobbers. Once they can get the share price above $5.00, the fund managers can buy us and then we'll really see the true potential unleashed. When you hear that type of talk ... run, take your wife and kids and leave your home unguarded.

There was some excitement heading into Sprint's February 8th earnings report. The stock popped to a pre-earnings intraday high of $2.55 on the 7th. Then Sprint reported and reality reared its ugly head. As I write this, S is down a couple more pennies to $2.29.

Sprint finds itself in between a rock and a hard place. It does not operate from a position of relative strength like AT&T and Verizon. These companies can afford to get fleeced a bit by Apple (NASDAQ:AAPL) on iPhone. Sprint might not be able to withstand the cash flow impacts and such. The more I think about it, a tie-up with Research In Motion (RIMM) might have actually made sense for Sprint.

I will never understand for the life of me why investors do not just put a little bit of cash in stocks like T and VZ each month. Over time, that's the superior way to invest. It beats the heck out of timing a hope and a prayer. And it also trumps buying FTR for a 16-17% yield only to watch the stock price implode by much more than that.

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The long-term rarely lies.

Disclosure: I am long AAPL, VZ.