GO
Loading...

5 Stocks Under $10 That Probably Won’t Double

Rocco Pendola|Contributor
Friday, 6 Jul 2012 | 11:25 AM ET

Let’s cut to the chase: Those articles that seem to pop up daily across financial media sites — “5 Stocks Under $10 That Will Double in 2012” — make me nauseous. They should turn your stomach, as well.

Not only do the authors make outrageous claims that could lure investors into low-probability trades, but they give hard-working and credible folks such as David Peltier, who runs TheStreet's Stocks Under $10 premium service, bad names.

I’m convinced that most of the folks who claim that “5 Stocks Under $10 Will Double in 2012” run a scan, pull a few optimistic-looking financials, and let her rip.

For goodness sake, I am long a few stocks under $10 that I feel like I have pretty solid handle on. I don’t even think they’ll double in 2012. And I sure as heck would not make such a bold and outrageous claim if I only had a hunch.

In fact, when you consider buying any stock, particularly a sub-$10 one, you should probably enter the trade with the exact opposite mindset. What a terrible way to start off a relationship with a stock, expecting a 100 percent return within a year. That’s quite presumptuous. It’s like expecting to round third base and not only slide, but slide headfirst, into home plate on the first date.

As much as we all love instant gratification and getting “rich” quick, there’s something about the chase and being able to nurture a position. A “take it slow, don’t expect too much” approach tends to pay off when you least expect it and prevents you from experiencing frequent disappointment.

This not the lottery. It’s investing. Stocks do double. But, you’re nothing short of a fool if you go into a trade expecting that to happen, particularly in an unrealistically short period of time.

Consider Research In Motion and Nokia. I am long the latter and consider the former a national disgrace. I do not expect either to double in 2012.

RIM could get bought out tomorrow for $18 to $20 a share. That’s a double. If Nokia moves from $2 to $4, that’s a double. That really doesn’t seem like much. In fact, it’s “only” two bucks. But myriad reasons exist why RIM is down 84 percent and Nokia is off by 76 percent over the last two years.

Right when you think a stock like RIM or Nokia cannot go lower, it does. In both cases, investors — for good reason — have absolutely no confidence whatsoever in management. As TheStreet’s Richard Saintvilus noted:

RIM is in no position to diagnose itself, regardless of what its CEO may want people to believe. Numbers don’t lie. RIM has done a lot more talking and a lot less executing, and it is time to reverse them. It can start a recovery — as faint as that may be — by just shutting up.

It’s only slightly different at Nokia, primarily because that company did several things RIM refused to do such as move faster to shake up management, abandon a dead-on-arrival operating system and forge a key strategic partnership. Now, here comes the hard part —executing.

That’s what makes claims that any stock in a position similar to the pickles RIM and Nokia find themselves in could double so absurd. Like Saintvilus says, RIM needs to shut up first, come up with a viable plan, and then implement it. Why should any investor give the company the benefit of the doubt in this respect?

If you enter a long position in RIM or, in my case, Nokia, approach it with a cautious and humble skepticism. Competitive headwinds and about 3.5 billion outstanding shares (at Nokia) should make anybody cautious, humble, and speculating in small doses. Don’t enter these stocks even half-expecting a double. That’s a great way to set yourself up to fail and mismanage a position.

Another stock you’ve been told by any number of people will double in 2012 is Ford Motor. Go into this trade with more than “a cautious and humble skepticism,” but with a time horizon measured by geological instruments.

Because Ford returned almost 1,000 percent between late 2008 and early 2011, the cats who argue it will “double in 2012” think it just has to happen again. And, heck, a mere double is only one-tenth of what the stock is capable of. As if, it’s a professional athlete coming off of a fluke season. The 50 percent haircut Ford took over the last year-and-a-half — it wasn’t a fluke.

There might not be a more certain industry on the planet than the auto sector, especially if you’re one of the major players trying to build business in Europe and China, while selling to a domestic customer too scared to spend and too poor to save. If I have to be in the space, give me shares of a luxury dealer who sells to people less concerned with price and the broad economy.

Don't expect Sprint Nextel or Sirius XM Radio to double anytime soon, particularly in 2012.

I have said all I care to say about Sirius, but I could not let one of the best points made to date about the prospects of that stock doubling pass. TheStreet’s Robert Weinstein made the point that rarely gets made, but should probably qualify every discussion of stocks such as Sirius:

The ability for Sprint to double is much easier with a smaller float and market cap relative to revenue. Sprint has 20 percent fewer shares and 10 times Sirius’s $3.1 billion revenue. Increasing the bottom line number is obviously much greater with Sprint than Sirius.

You don’t need to double your money to make an investment a decent one. Both Sprint and Sirius offer the ability to profit. I believe the best way toward profits with Sprint and Sirius is through options. Friday’s closing price of $1.85 or less is a buying opportunity with Sirius.

The key takeaway for me, however, is, “You don’t need to double your money to make an investment a decent one.” Wise words.

And Robert doesn’t play around. Since his article, Sirius has returned 13 percent. He’s been advocating bullish options plays with Sprint for weeks in our Options Investing Newsletter. That stock, of course, is up roughly 20 percent over the last three months.

Even with this upside, Robert advocates more conservative approaches to both stocks via options (yes, you can actually decrease your risk exposure when using options).

At day’s end, it’s all about having been around the block a few times. The “this or that stock will double this year” crowd shows off a rudimentary and incredibly dangerous grasp of the stock market. You’ll get burned by the touts they run through their assembly lines.

—By TheStreet.com Contributor Rocco Pendola

Additional News: Analyst to RIM: Time to Sell, It’s ‘Now or Never’

Additional Views: As Telecom Surges, Sprint Emerges

_____________________________

CNBC Data Pages:

______________________________
Disclosures:

TheStreet’s editorial policy prohibits staff editors, reporters, and analysts from holding positions in any individual stocks.

Disclaimer

  Price   Change %Change
F
---
NOK
---
BB
---
S
---
SIRI
---

Featured