This simple task to find the best ten stocks under $10 turned into a major project I was not expecting. After the recession the number of stocks under $10 increased significantly as many big caps returned to small cap status.
Obviously just being under $10 is only the first criteria I was looking for. Preferably a stock needed to have some prior history at a much higher level, be in a sector with improving fundamentals and be posting earnings with decent growth. I looked for stocks on the rebound with a good story behind them. Many stocks have declined under $10 because they deserve to be under $10 and probably under $5 because their business has turned negative during the recession. For instance the private mortgage insurers PMI and RDN popped up on the initial scan but with the possibility of as many as two million foreclosures in 2011 I would not buy either on a bet.
Because I follow the energy market so closely it was easy to add a few opportunity stocks in the energy sector. After that it became progressively harder to pick just ten stocks. There were hundreds of viable candidates and I easily looked at more than 2,000 charts and countless news items. Once I get involved in the hunt it becomes a challenge to find the best possible and then weigh all the factors on each.
The Top Ten ETFs will be posted by March 1st.
Top Ten Stocks Under $10
C - Citigroup Inc
It would be hard to have a Top Ten Under Ten without having Citigroup on the list. It is the largest market cap stock with a price under $10. The problem with Citigroup is the massive number of shares outstanding as a result of the government bailout. Citi has 29.06 billion shares outstanding and a market cap of $142 billion.
Obviously Citi is going to have a reverse split in the near future in order to reduce the float and put the stock back into a reasonable range for funds to justify buying it. A 1-for-10 split would reduce those outstanding shares to 2.9 billion and raise the stock price to $49.
Citigroup itself is actually doing rather well. The chief economist at Citi, Willem Buiter, said in early February "the world economy continues to do remarkably well."
John Paulson, who some would call the greatest investor in the world, still has a major position in Citi and has already made over $1 billion from the Citi rebound. He said he will continue to hold it because analysts are underestimating the potential for the U.S. recovery.
Citigroup reported in mid February that credit quality was rapidly improving with the charge-off rate declining to 7.49% in January from 8.34% in December. That is the lowest point since Feb-2009 and it was the largest drop among the top six credit card issuers. Those charge-offs peaked at 12.14% in September 2009. Late payments fell from 4.44% to 4.35% and the lowest level in more than two years.
Citi still has some challenges in front of it like the potential resolution of the foreclosure crisis and lingering problems from Lehman. There will be some rough patches but Citi will emerge as a healthy international bank with global assets. They just have to work through the legal problems and the residual from the financial crisis. CEO Pandit expects $20 billion in profits in 2012.
Buy Citigroup Stock, symbol C, currently $4.70
Chart of Citigroup
Denison Mines Corp
Denison Mines Corp. is an intermediate uranium producer in North America, with mining assets in the Athabasca Basin region of Saskatchewan, Canada and the southwest United States including Colorado, Utah, and Arizona. The Company also has ownership interests in two uranium mills in North America. Denison also has a strong exploration and development portfolio including the Phoenix discovery in the Athabasca Basin, as well as large land positions in the United States, Canada, Mongolia and Zambia.
Dennison produced 1.6 million pounds of uranium in 2010 and 2.8 million pounds of vanadium.
Uranium prices are moving steadily higher as countries attempt to stockpile fuel for future nuclear power plants. Morgan Stanley claims there are 147 new plants under construction around the world. If you include those proposed or already in the permitting process the number rises to 330. China has 159 proposed plants, India 60, Russia 44 and United States 31. With slightly over 400 plants currently in operation the new plants will nearly double existing demand and far exceed supply. It takes 400 tons of uranium to fuel one reactor for one year.
Please read this link for further background on the demand spike just ahead: Click here
Denison Mines currently produces uranium at a cost of $30 a pound and current uranium prices are over $70. This company is an excellent takeover target with Cameco a likely suitor. They have several joint projects.
The price of uranium is only going higher as more electrical demand creates the need for more environmentally clean nuclear plants.
Buy Denison stock, symbol DNN, currently $3.88
Chart of Denison
HERO - Hercules Offshore Inc
Hercules Offshore is a leading global provider of offshore contract drilling, liftboat and inland barge services. Their fleet of jackup rigs is the fourth largest in the world and the largest in the U.S. Gulf of Mexico. They also own and operate the largest liftboat and inland barge drilling fleets in the world. Their unique fleet is capable of providing services such as oil and gas exploration and development drilling, well service, platform inspection, maintenance and decommissioning operations in shallow water markets.
Hercules was crushed by the collapse in the natural gas market. As a jackup rig operator their primary business in the U.S. is shallow water gas wells in the Gulf. When prices for gas dropped so low the number of firms wanting to drill offshore fell as well. When the BP oil spill occurred and the government stopped issuing permits it was another blow to the leasing business. If companies can't get permits they won't lease a rig. In the jackup sector the leases are short term and defined in months compared to the multi year leases on deepwater rigs.
On the bright side they have weathered the storm and are prepared for business to resume once the permits begin to flow. In theory permits in water depths less than 500 feet were not impacted but in reality they were halted as well except for a very few. We should be very close to a restart of the permit process.
In early February Seahawk Drilling (HAWK) also a jackup operator gave up the fight and plans to file bankruptcy. They agreed to sell all their rigs to Hercules for $105 million. This gives Hercules some decent hardware and removes a competitor from the Gulf.
Hercules is not Gulf dependent. They have operations around the world. I believe this is an opportunity to pick up a good company cheap. As oil prices continue to climb there will be more effort to drill anywhere there is oil and not just onshore and in deep water. The smaller fields near shore will become more profitable to produce.
Buy Hercules Offshore, symbol HERO, currently $4.98
Chart of Hercules Offshore
BEE - Strategic Hotels & Resorts
Strategic Hotels & Resorts, Inc. is an industry-leading owner and asset manager of high-end hotels and resorts. They own a quality portfolio of upper upscale and luxury hotels and resorts in desirable North American and European locations. The portfolio is currently made up of 16 properties totaling 7,630 rooms. These are unique hotels with complex operations, sophisticated customers and multiple revenue streams. Our properties are geographically diverse and include large convention hotels, business hotels and resorts, which are managed by internationally known hotel management companies.
Some of their properties include Fairmount Hotels, Ritz Carltons, Westins, Intercontinentals and Four Seasons properties. They own a total of 20 high-end hotel properties.
The stock classified as a Real Estate Investment Trust (REIT). A REIT must pay out 90% of its income to shareholders in the form of dividends. When the financial crisis hit the hotel business crashed. Strategic and many other REITS fell into the loss column and did not pay dividends for the last two years. Strategic's guidance with their recent earnings projects a return to profitability in 2011 and the stock is recovering from its multiple year slump thanks to that guidance.
This is a decent stock with some excellent properties that should do well as the economic recovery accelerates.
Buy Strategic Hotels & Resorts, symbol BEE, currently $6.52
Chart of BEE
GMXR - GMX Resources
Founded in 1998, GMXR is a "Pure Play", E & P Company with one of the most concentrated Haynesville/Bossier (H/B) Horizontal Shale Operations in East Texas. The company began drilling in Texas, targeting the Cotton Valley and Travis Peak formations through vertical drilling and in 2008 and transitioned to drilling horizontal Haynesville/Bossier wells and have steadily grown reserves to 442 billion cubic feet (Bcf) at September 30, 2010.
This is a small gas driller quickly adding leases in liquids rich locations. Earnings for Q4 will be announced on March 2nd. Earnings for Q3 were 8-cents compared to a loss of 12-cents in the 2009-Q3.
The company weathered a tough period in the gas fields during 2009 and like everyone else in the sector they are trying to add more oil assets to their balance sheet. They subleased two of their four Helmerich & Payne FlexRigs in 2009 to other drillers until gas prices stabilized and availability of fracturing services came available to complete existing wells. There is an extreme shortage of fracturing services with waiting periods of several months in some cases. By subleasing out the rigs they avoided $29 million in lease rentals during a rough period for gas drillers.
One of those rigs was scheduled to come back to GMXR in January 2011 and be used by GMXR at least through July. The second rig will continue on sublease until April 2012.
GMXR has acquired large land positions in the various shale basins including the oil rich Bakken and Niobrara. They have 81 planned wells in the Bakken and 254 wells plotted in the Niobrara plus another 261 in the Haynesville/Bossier. Proved reserves rose from 355 Bcfe in 2009 to 442 Bcfe on 9/30/2010. They have 1,357 undrilled locations and 2.679 Tcfe of reserve potential.
Investor interest is growing on these small drillers as acquisition targets. With all the available land already leased in the major plays the only way to add to reserves is to buy it from somebody else. Companies this small with a proven track record and quality assets make easy targets. When land was initially being leased in these horizontal shale plays the prices were in the $1,000 to $4,000 per acre range. Recent acquisitions have valued that same acreage in the $15,000 to $20,000 per acre range.
It may take a while for gas prices to recover but these small drillers just keep plugging away and building their reserve base. When prices do return they will be highly profitable. Plus, GMXR is moving to add to their oil assets in order to broaden their reserve base and income potential.
Buy GMX Resources, symbol GMXR, currently $5.39
Chart of GMXR
FTK - Flotek Industries
Flotek Industries is a diversified global supplier of drilling-and production-related products and services to the energy and mining industries. They manufacture and sell specialty chemicals used in oil and gas well fracturing, cementing and blending. The drilling products division manufacturers, sells and rents specialized equipment for drilling oil and gas wells in the USA, offshore in the Gulf and around the world including drill bits, reamers, pumps, separators, etc.
The drop in activity in North America after the 2008 crash was very painful for FTK shareholders. The company restructured operations and regrouped to deal with the new normal. Fortunately drilling activity in North America has exploded over the last year and has returned Flotek to profitability.
Earnings are not until March 17th but they released guidance in early February claiming stronger pricing, stronger demand and consistent improvement in revenues over each of the three months in Q4 and in each quarter in 2010. During this period the company continued to pay down debt and release new products.
Flotek's rental tools are found on more than 25% of the rigs in the USA. Sales are expected to increase by more than 50% in Q1.
Buy Flotek Industries, symbol FTK, currently $6.53
GLBL - Global Industries
Global Industries was started as a small diving company in Louisiana in 1973 and has grown to an international offshore construction and demolition company. Global has grown by acquisition of more than a dozen companies since the mid 1980s. Assets acquired from Sea-Con Services, Santa Fe Offshore Construction Company, Teledyne Movible Offshore, Divcon International, ROV Technologies, The Red Adair Company, and selected assets from SubSea International, J. Ray McDermott, Halliburton, and Oceaneering International have helped Global Industries become an offshore construction giant.
They specialize in offshore construction, engineering, project management, pipeline construction, platform installation and removal and deepwater installations. Global has ships that can lay continuous pipe up to 48 inches in diameter.
As an added reason to buy GLBG the government recently ordered the owners of 3,500 wells that have not been productive for at least five years to permanently plug them in order to avoid another oil spill. Over 650 gulf platforms must be dismantled. Many of these wells will require divers, heavy lift barges and specially designed service ships to remove obsolete infrastructure and install the permanent plugs. The cost to plug and dismantle these 3500 wells is estimated to be as high as $3.5 billion. Many of these are wells that were temporarily shutdown because of damage to platforms and while still capable of production the cost to repair the platforms was prohibitive when oil was $30. Now with oil at $100 many of them may be resurrected and put back to work. Everything requires a company with experience and the hardware capability and this is Global's market.
The future of offshore oil and gas drilling is going to require an increased amount of drilling, production and infrastructure creation in deepwater as well as shallow. Global will continue to grow market share around the world thanks to their specialized services.
They are also a takeover target for somebody like GE. General Electric is moving into the oilfield service business in a big way with multiple acquisitions over the last couple years. Despite Global's size in the space and their asset base their market capitalization is only a billion dollars. That is lunch money for GE and gives them a foothold into every segment of the offshore infrastructure market.
Buy Global Industries, symbol GLBL, currently $8.63
Chart of Global
CRBC - Citizens Republic Bancorp
Citizens is a $10 billion diversified financial services company dating back to 1871. It is the largest bank holding company in Michigan and the 52 largest in the USA. Because they are located in Michigan and have 218 locations in Michigan, Ohio, Wisconsin and Indiana they were badly hurt by the financial crisis in 2008.
They are rapidly recovering from the crisis and have been eliminating problem loans and assets like crazy. The reduced the level of non-performing assets by 35% in Q4 and their watchlist declined by 20% and delinquencies by 25% and the lowest level since 2006. Their plan calls for an elimination of certain problem assets by the end of Q1. They expect to return to profitability by Q3 2011 according to the CEO.
I do not believe this bank is in trouble of failing. Their Tier 1 capital ratio at 12.11 is more than double the 6.0 "Well Capitalized" level required by regulatory agencies. Their total capital ratio is 13.50 compared to a "Well Capitalized" level of 10.00.
Their crisis has passed and once they return to profitability their share price should begin to recover. They have weathered numerous economic downturns over their last 138 years and survived. That is no guarantee of future survival but I believe they are out of danger.
They are also a takeover candidate. They currently have roughly $10 billion in assets but their market cap is only $318 million. An acquiring bank could buy them cheap, dump the non-performing assets and worst case split up the company and sell off the regional banks in geographical segments to unlock value. Their real estate is worth more than their market cap.
The banking crisis pushed their stock price to a low of 48-cents. The current price is only 80-cents. As long as you don't go wild with the low stock price and buy an unreasonable number of shares the risk is minimal. The possible returns are enormous over the years ahead. I am not betting on its return to the highs over $40 but I could easily see it over $10 in the next couple of years as long as the economy cooperates.
Just don't buy so much that an unexpected failure would cause a material loss. You can always add to your position as the outlook improves.
Buy Citizens Republic Bancorp, symbol CRBC, currently 80-cents
Chart of CRBC
SRZ - Sunrise Senior Living
Sunrise Senior Living employs approximately 31,700 people. As of year end 2010 Sunrise operated 319 communities located in the United States, Canada and the United Kingdom, with a unit capacity of approximately 31,200 units. Sunrise offers a full range of personalized senior living services, including independent living, assisted living, care for individuals with Alzheimer's and other forms of memory loss, as well as nursing and rehabilitative services.
With the boomer generation starting to retire there will be a lot of medical problems that require assisted living facilities in the coming years. Dementia, arthritis, stroke, etc will be forcing many to move to nursing care facilities. I just put my 92 yr old mother in a home and the expense was unbelievable. Sunrise is going to be a cash cow in the years ahead.
However, the last several years have not been kind to Sunrise. They grew too fast, expanded too broadly and suffered from rising debt loads. Like every other company in America over the last two years they have been aggressively restructuring. They sold off non-core assets and reduced debt considerably.
In 2010 debt decreased from $440.2 million to $163.0 million thanks to the asset sales. Earnings in Q4 were 87-cents compared to 19-cents in the year ago quarter. Unfortunately some of those earnings were one-time sales of properties so they won't be repeated in Q1.
Long term I believe they learned their lessons and they know how to not become over extended in the future.
I am probably early on this play but I think this is a good hold for several years in an IRA. None of us are getting any younger and Sunrise will be there with a wheelchair waiting when we need them.
Buy Sunrise Assisted Living, symbol SRZ, currently $10.30
They were under $10 when I wrote the description but earnings spiked them the day before I published this page. I believe they will decline back under $10 in March so I am keeping them on the "under $10" list.
Chart of Sunrise
SD - Sandridge Energy
Sandridge Energy was started by a co-founder of Chesapeake Energy (CHK). Sandridge is primarily an oil and gas exploration and production company. Currently 100% of their rigs are drilling for oil. Over 80% of their revenue comes from oil. They are primarily active in Texas and Oklahoma drilling shallow wells in proven oil fields. They currently produce about 64,600 Boepd with 30,000 barrels of oil. The company currently has more than 20,000 potential drilling locations of which 11,100 are oil.
In 2009 they operated two rigs in the Permian Central Basin Platform. Currently they have 16 active rigs.
In the Permian Basin the average well produces about 75,000 barrels of oil equivalent at the rate of about 50 bpd. That equates to a payout of roughly $7 million per well. They have 8,073 potential undrilled locations.
They have acquired 750,000 acres in the Mississippian Play with an average cost of $200 per acre. In early 2009 they had one active rig on that play. Today they have 11 active rigs there.
The Mississippian wells produce an average of 300,000 to 500,000 Boe with 52% crude oil. These are 6,000 foot horizontal wells with a cost of $2.7 million each.
Basically Sandridge was a gas E&P driller that saw the future in low prices and made the switch to oil and did it quickly. They have sold off most of their gas assets in the Haynesville, Piceance, Cana, Delaware Basin and Wolfberry locations. They used the proceeds to bulk up on oil leases and rigs and have just turned the corner into full speed oil production. They still have nearly 9,000 planned locations for gas wells once the price of gas returns.
They currently have 31 active rigs drilling for oil and all are drilling in proven fields. The average drilling time is 21 days. To say these guys are on speed is an understatement.
I think this stock is going to explode before the year is out as their production curve accelerates. With oil prices closing in on $100 and probably going higher before the year is out, Sandridge has a license to print money.
They were under $10 per share when I initially wrote this but spiked over $10 the day before I published this report. I kept them on the list because that 50-cent move over $10 is only the tip of the iceberg.
Buy Sandridge Energy, symbol SD, currently $10.52
Chart of Sandridge