5 Stocks Under $5 To Buy For The Next 4 Years

Includes: BRCD, FTR, NOK, SIRI
by: David Alton Clark

The Gist

The market sold off again Thursday with the Dow down over 400 points in two days posting the biggest two day drop in 2012. A major portion of the drop was attributable to a drop in McDonald's Corp. (NYSE:MCD) shares as same-store sales fell for the first time since 2003 in the last quarter. The Dow has dropped below its 200-day sma for the second time this year. This is a major technical milestone for the market.

Chart provided by CNBC.com

Whenever major milestones are achieved it is always prudent to review your current positions and assess the stocks on your watch list for potential buying opportunities. Market corrections often provide the opportunity to purchase stocks in solid companies at a discount price. With the proliferation of ETFs and Index funds, stocks are sold off indiscriminately. Volatility and correlation in stocks increases as well. The following are five stocks on my watch list I felt have significant upside potential in the coming years.

The Goods

The stocks selected are trading on average 35% below their 52-week highs and have 16% upside potential based on analysts' estimates. This fact alone carries little weight, but it's a good starting point when looking for buying opportunities.

The five stocks have positive fundamentals and share prices trading at or below $5. Stocks trading for $5 or less tend to be more volatile with frequent, larger percentage moves in the stock price. This provides the opportunity for greater returns (or losses) relative to the market. These are stocks with market caps of $2 billion or greater. These are speculative stocks in solid companies that may provide more bang for your buck.

In the following sections, we will perform a review of the fundamental and technical state of each company to determine if this is the right time to stay with the position or sell out. The following table depicts summary statistics and Thursday's performance for the stocks. The following charts are provided by Finviz.com.

Alcatel-Lucent, S.A. (ALU)

The company is trading 59% below its 52-week high and has 33% upside potential based on the analysts' mean target price of $1.46 for the company. ALU was trading Thursday for $1.10, up 10% for the day.

Fundamentally, ALU has several positives. EPS growth for this year is 272% and next year is expected to be 183% according to Finviz.com. ALU is trading for approximately 60% of book value. The company has $2.76 in cash per share. Book value per share is $1.93.

Technically, ALU has been bouncing along the $1 low for several months now. The recent 10% pop has managed to breach the 50-day sma resistance line which is bullish for the stock. All critical moving averages have slowed their angle of decent. It appears ALU may have found a bottom.

Alcatel-Lucent appears to be rallying based on the news AT&T (NYSE:T) says it plans to spend $22B on capex each of the next 3 years. The telecom sector is growing by leaps and bounds currently. The risk reward ratio is favorable for the long haul at this point. The stock remains a buy, although I would wait for it to pull back a bit prior to starting a position with the recent pop.

Brocade Communications Systems, Inc. (BRCD)

Brocade is currently trading at 15% below its 52 week high and has 13% upside potential based on the consensus mean target price of $6.20 for the stock. Brocade closed Thursday at $5.48, down over 1% for the day.

Brocade has some fundamental positives. The company is trading for 1.15 times book value and has a forward PE of $8.98. Brocade is trading for 4.92 times free cash flow. EPS is up tremendously quarter over quarter.

Technically, the stock is still in an uptrend, yet has performed a nearly 50% retracement from the near-term high of $6.50. The stock has been in a well-defined trading range between $4.50 and $6.50 for the past few months.

The company beat last quarter earnings estimates by announcing earnings of 13 cents per share. The beat was driven by a significant increase in revenue and expansion of margins. The stock is a value play here. I may start a position in this stock prior to the earnings announcement set for November 19th after the market closes.

Frontier Communications Corporation (FTR)

The company is trading 17% below its 52-week high and has 20% upside potential based on the consensus mean target price of $5.24 for the company. Frontier was trading Thursday for $4.35, down over 3% for the day.

Frontier has some fundamental positives. Frontier pays a dividend with a yield of 9.20%. The company is trading for slightly over book value, 85% of sales and has a forward P/E of $16.11. The company's gross margin is 90.75%.

Technically, Frontier has been in an uptrend since May. The golden cross was achieved at the beginning of September. This is a very bullish development. This is only the second time the stock has pulled back and tested the bottom of the trend channel this year. The last time it did it rallied significantly afterward.

Frontier recently announced earnings that met top and bottom line estimates, yet the stock has sold off. The loss of 50,000 customers could be the culprit. Nevertheless, that is an improvement over last quarter so they may be on the way to stopping the bleeding. Frontier's 2012 free cash flow guidance was unchanged at $900M-$1B. I posit telecom stocks will outperform the market going forward as the build out to support the tremendous amount of data being transferred continues. I see the recent pullback as a buying opportunity and the 9% dividend provides some insurance. I like the stock here, but if you want to be extra cautious, wait for the stock to test support at the 200-day sma prior to starting a position.

Nokia Corporation (NOK)

The company is trading 59% below its 52-week high and on par with its consensus mean target price of $2.63 for the company. Nokia was trading Thursday for $2.62, down nearly 1% for the day.

Fundamentally, Nokia has several positives. Nokia is trading for approximately 97% of book value, 24% of sales and has $3.09 in cash per share. EPS next year is expected to rise by 81%. Nokia pays a dividend with a 9.64% yield.

Technically, the stock has rebounded nicely since July and has established an uptrend. The stock is currently in a breakout position at the apex of a descending triangle. This is usually when a major breakout move will occur.

AT&T is offering Nokia's Lumia 920 for $450 without a contract. Nokia's is aggressively pricing their product which bodes well for the company. The 16GB iPhone5 goes for $649 without contract, and Samsung's (OTC:SSNLF) Galaxy S III sells for $549. With a dividend yield of nearly 10% and Microsoft (NASDAQ:MSFT) backing, the risk/reward ratio looks positive for the stock. Nokia is a buy here.

Sirius XM Radio Inc. (SIRI)

The company is trading 10% below its 52-week high, and has 16% upside potential based on the analysts' mean target price of $3.11. Sirius stock was trading for $2.67 Thursday, down over 2% for the day.

Fundamentally, this stock has several positives. SIRI has a forward P/E of 26, and trades for 22 times free cash flow. EPS for the next five years is expected to rise by 28%. Quarter-over-quarter sales are up 14%. SIRI's TTM ROE is 142%, and the company's net profit margin is 103%.

Technically, Sirius stock has been in a well-defined uptrend since the start of July. The coveted golden cross was just achieved by the stock. This is when the 50-day SMA crosses above the 200-day SMA and is considered extremely bullish. The stock has pulled back to the bottom of the current uptrend channel and just above the 50-day sma.

In my last missive regarding the stock I stated to wait for the stock to pull back to the 50-day sma prior to starting a position. This has occurred. I like the stock here. I expect the next catalyst will be the announcement of the new CEO. This will take some time. I like the stock here, but layer in to the position to reduce risk.

The Bottom Line

"Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria." - John Templeton

One of John Templeton's mantras was "outperforming the majority of investors necessitates doing what they are not doing." Most people are selling so I am looking to buy. I do not think this is the start of a major sell off. I believe we are in for a bumpy ride as 2012 closes out. Tax loss selling and profit taking will carry the day. This will provide several opportunities to get into premium stocks for a discount price as weaker hands fold and sell out. Do your own due diligence and take your take building a position. Buy stocks in companies with solid chances for long-term organic growth.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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: This is not an endorsement to buy or sell securities. Investing in securities carries with it very high risks. The information contained within this article for informational purposes only and is subject to change at any time. Do your own due diligence and consult with a licensed professional before making any investment decisions.