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Quality Stocks Under $10
Posted: Sep 23, 2009 08:32 AM by Sham Gad
The only reason to fixate on a stock price is in relation to the value you are getting. For example a quality company like Nucor Steel (NYSE:NUE), with its efficient flexible steel operations, is likely a better bet going forward than MBIA (NYSE:MBI) even though Nucor trades for around $50 versus $8 for MBIA. In the short run, MBIA's stock could experience a stronger surge, but dollar for dollar I prefer the earnings power of Nucor any day.
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An Interesting Note on Price
But there is a reason as to why finding quality gems under $10 may be a rewarding bet. Mutual funds and pension funds, whose buying and selling activity account for the bulk of the market's moves, are often prohibited from touching stocks under $10 because they are deemed "too risky."
As a result, a good business that sees its stock go below $10 may simply be sold off for no other reason than the rules governing the mutual funds. As a result, some excellent ideas can be found looking at the under $10 list. Also, if the share price rebounds to attract the attention of the mutual funds again, that's another reason to propel the stock higher.
Good Old Businesses
Focus on businesses with quality, boring, hard assets that can earn money for the business over the long run. Travel Centers of America (NYSE:TA) is a company that could be worth a look. The company owns and operates the major highway gas stations that you see when traveling. And by major I mean the gas stations that can serve dozens of major trucks at a time. Often these stations will include a couple of restaurants, a large convenience store, and sometimes a motel for tired truck drivers.
These stations aren't going anywhere and when the economy picks up, so will the business. The shares are now at near $6, off a low of $1 but nowhere near the high of $22 a couple of years ago. (For related reading, check out Five Mid Caps The Pros Own)
Mueller Water (NYSE: MWA) is a manufacturer of water infrastructure products for the residential and municipal markets. The residential business is terrible today, but it's not permanently doomed. Shares are $5.50 and you are getting a company with many products that command the number #1 or #2 market share.
Crosstex Energy (NYSE:XTXI) is a business that gathers and transmits natural gas from producers to sellers. In other words, the company owns the pipelines needed to move natural gas around. Pipelines are like monopolies; once you own them, it makes no sense for a competitor to build a pipeline to compete in your area. At $4.40 Crosstex is both asset rich and debt laden. Fortunately, the transmission of natural gas is a relatively stable cash flow business which should enable Crosstex to meet its debt payments even during these tough times.
Boring is Good
The above businesses operate in boring businesses. To me, boring translates into lack of competitive threats, a very good problem to have in a tough economy. As the market has rallied so have these shares. But in the long run, as the business environment improves, so should these companies' fortunes. (For further reading, check out Invest In Companies That Make Things.)
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By Sham Gad
Sham Gad is the Managing Partner of Gad Partners Fund's, value inspired investment partnerships modeled after the Buffett Partnerships of the 1950's. Previously, Gad ran the Gad Investment Group and delivered annualized returns of 22% from 2002 to 2005. Gad is also the author of "The Business of Value Investing" which will be out in the fall of 2009. Gad earned his MBA at the University of Georgia in May of 2007. Gad runs a value investing blog. He can also be reached by visiting the Gad Partners Funds site. When not writing or analyzing businesses, Gad enjoys hanging out with his wife Maggie, reading, golf, and yoga
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