Cheapies

By Malcolm Berko

October 14, 2015 5 min read

Dear Mr. Berko: I have $12,000 that I want to invest in several speculative stocks that trade under $12 a share and that could appreciate by 50 percent or more in the coming 12 months. Give me your best shot and I won't blame you if your recommendations go south on me. — BE, Erie, Pa.

Dear BE: I don't have a "best shot." I know very little about low-priced stocks, but I know enough to tell you that the primary reason low-priced stocks are cheap is that's all they're worth. The share price of every low-priced stock is determined by two factors: the consensus of investors who believe that the company has an attractive future and are buying the shares and the consensus of investors who don't believe that the company's future looks attractive and are selling the shares. But every once in a while, there is a sharp-eyed professional who claims he has X-ray vision that allows him to see golden nuggets that are not apparent to less skilled investors. Sir Melgrove Smythe, who hails from the English village of Crackpot in North Yorkshire and just returned from Guam after waiting for the war to end, may be among the few who possess such skills.

Sir Melgrove believes that Alcoa (AA-$9.93) could return to $17, where it traded in January of this year. A $24 billion-revenue company, AA is a global leader in the production of lightweight metals, including aluminum, titanium and nickel. These metals are used in aircraft, automobiles, commercial transportation, construction and packaging and have numerous industrial applications. Sir Melgrove expects earnings to fall by 20 percent this year, to 75 cents a share. But in 2016, with revenues of $25.1 billion, AA could earn $1 a share. It has a book value of $12.20 and a niggardly 12-cent dividend. Analysts at Vanguard, J.P. Morgan, State Street and BlackRock are also believers and own over 250 million shares. And CEO Klaus Kleinfeld, who owns 1.9 million shares of AA, may also be a believer. I'm not.

Sir Melgrove is enthusiastic about CTI BioPharma (CTIC-$1.63), which makes me think this chap may have lost a few marbles. This $60 million-revenue, 132-employee biotech company traded in the mid-$70s in October 2000 and subsequently had four reverse splits — a 1-for-4 split in 2007, a 1-for-10 split in 2008, a 1-for-6 split in 2011 and a 1-for-5 split in 2012. CTIC is engaged in the development and commercialization of novel therapies for blood-related cancers. Several CTIC-watchers believe that clinical trials for several CTIC drugs will present positive results. And the five analysts who follow CTIC believe that the shares could trade within a target range of $3.50 to $8 by 2016. I doubt it.

GenMark Diagnostics (GNMK-$8.34) is a $38 million-revenue molecular diagnostic company that designs, manufactures and sells instruments and molecular tests based on its proprietary eSensor detection technology. GNMK also sells automated molecular diagnostic systems to hospitals and reference labs that test for respiratory viruses, cystic fibrosis, warfarin sensitivity, thrombophilia risks and hepatitis C. Wall Street expects revenues of $53 million next year, but there are no profits in sight. I was surprised to learn that J.P. Morgan, Putnam Investments, T. Rowe Price and Fidelity Investments own 21 million shares of the 39 million-share float. Sir Melgrove believes that GNMK could be a $16 stock in the next 12 months. And I agree!

And CVR Partners (UAN-$10.16) is a $300 million-revenue limited partnership that makes and sells nitrogen fertilizers. A scheduled plant shutdown for repair and maintenance reduced UAN's revenues and earnings in 2015 by about 10 percent, to 95 cents a share. However, the long-term outlook for nitrogen remains promising, so revenues and earnings should recover nicely in 2016 and in future years. The $1.56 payout yields 14.5 percent, and Sir Melgrove believes that UAN's payout will reach $2 a share in the coming three years. It's possible!

I have no feel for any of these highly speculative issues, although increasing demand for fertilizers suggests that there could be some compelling reason to own UAN, and GNMK seems to have good sponsorship.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at [email protected] To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

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