5 hot stocks at Big Mac prices

For less than $5 a share, you can score some real bargains among small caps right now. And you might wind up doubling your money in a year.

 

By Michael Brush

If holiday shopping has blown your budget, here's some relief: Wall Street is offering bargains.

The stocks of many small yet promising companies have been hammered as nervous investors have shifted funds to the perceived safety of big businesses with proven track records.

 

Here's the upshot: There's a fresh crop of stocks under $5 a share that could double in a year as investors come to their senses and realize the subprime-mortgage debacle won't bring economic Armageddon.

 

My five favorite stocks selling for less than the price of a Big Mac meal are stem-cell-research company Neuralstem (CUR, news, msgs), flat-panel-TV designer Syntax-Brillian (BRLC, news, msgs) and energy companies Teton Energy (TEC, news, msgs), International Royalty (ROY, news, msgs) and Abraxas Petroleum (ABP, news, msgs).

 

These stocks may see a bounce soon because of the January effect -- a rebound once the pressure of year-end tax-loss selling abates. But the bigger gains will come after some key changes in investor psychology play out.

 

"This is a flight-to-quality market, so anything perceived as risky has had a really hard time making headway," observes Eric Barden, a co-portfolio manager of the Texas Capital Value and Growth Fund. "But when this turns, it is going to turn really fast."

 

When is the turnaround coming?
Barden thinks it could be six months before investors develop an appetite for riskier small-cap stocks.

But I think he may be in for a surprise, and our under-$5 stocks could bounce back sooner than that. Here are four reasons why, thanks to James Paulsen, an economist and market strategist with Wells Capital Management:

We've been waiting at least six months for the subprime disaster and housing weakness to bring down the economy. So far, they haven't. Employment and wage growth are hanging in there. Consumer spending was solid in November. Foreign demand for the goods we make is healthy. At some point, investors will realize the much-feared economic disaster ain't gonna happen -- and they'll develop a taste for riskier areas of the markets again, such as stocks selling for less than $5. The underlying conditions are still in place for decent economic growth: falling interest rates, government deficit spending, a weaker dollar and a continued expansion in the money supply.

 

Fears about shortages of liquidity -- the availability of money -- are overblown. Just look at the record levels of personal net worth in this country, the solid corporate balance sheets, currency reserves held by central banks and the amount of investment cash in the sovereign funds of foreign governments. "It's a preponderance of fear that is keeping liquidity in the closet, not a shortage of liquidity," Paulsen says. "If someone says things are OK, then watch the liquidity come out." Wait for signs that subprime-related write-offs are easing or for signs of continued economic strength to calm jitters. Again, a change in psychology will benefit the least liquid stocks the most, including our under-$5 stocks.

 

The weaker dollar helps small-cap stocks as much as big companies, if not more, because the cheap dollar attracts foreign buyers to our shores. Large-cap companies already have an overseas presence.

Historically, small-cap stocks do well when there is inflation, which is making a comeback.

 

So now, here's a closer look at five stocks trading for less than $5 that should benefit from these trends, as well as company-specific developments. To find these stocks, I looked for companies where insiders are buying the most, and I consulted with investors with good records who specialize in this part of the market.

 

Hope for paraplegics?
Researchers working with the tiny biotech company Neuralstem have discovered that if you implant the right human stem cells into the spines of paralyzed rats, the cells take over and regenerate in a way that allow the rats to walk again. This stunning breakthrough shows the promise of a controversial area of medicine known as stem-cell research.

 

But would this work in humans? The world is about to find out. By March, Neuralstem may begin testing the same science on humans in a study at the University of Pennsylvania. As early as three to six months later, it could start to see results. If this process, known as regenerative medicine, or cell therapy, shows promise in the study, I'd expect nice gains in this under-followed stock, which recently traded for $2.85 a share.

 

The Pennsylvania study will test the use of stem cells to treat a kind of paralysis called ischemic paraplegia. This occurs when people have a hemorrhage in the spine, typically because doctors had to clamp the aorta, the main artery from the heart, when treating another problem. Strictly speaking, this is just a "feasibility and safety" study.

 

"But these will be real patients getting the real thing from the beginning, so we expect to see if we have impact," says Neuralstem Chief Executive Richard Garr.

 

Later next year, Neuralstem will likely begin testing cell therapy on patients with Lou Gehrig's disease or traumatic spinal cord injuries. The technique might also be used to treat other central-nervous-system disorders, such as Parkinson's and Alzheimer's diseases, and even depression.

 

Neuralstem is a player in this space because it owns technology that allows doctors to reproduce huge amounts of stem cells and to shut off the reproduction process when enough have been made.