What do Sirius Satellite Radio, TiVo, Playboy, and Taiwan Semiconductor have in common? Their shares trade under $10
Americans have always had a love affair with low prices. What's not to like about grabbing a cheeseburger for a dollar at McDonald's (MCD ), or a bottle of soda for 50 cents at Wal-Mart (WMT )? In the investing world, there's a similar psychological appeal to stocks that trade for less than $10 a share.
A modest share price has advantages. The standard unit for stock transactions is a round lot, or 100 shares. Any order that can't be broken up into round lots is called an odd lot, and can lead to extra fees. Still, savvy investors know that low-priced stocks aren't necessarily cheap. That's why investors and analysts spend so much time studying measurements to assess a stock's valuation. The old saw -- some things are cheap for a reason -- always holds true.
Of course, the whole point of bargain-hunting is finding diamonds in the rough. This week's Five for the Money looks at stocks with attractive prospects and share prices below $10. Keep in mind, though, that these stocks carry higher risk than other, more established names. So even though the pricetag may tempt you, think carefully before putting any of them in your cart.
1. Listen to the stars. Howard Stern for $100 million a year? That probably doesn't sound like a steal. But Sirius Satellite Radio (SIRI), the radio operator paying the shock-jock's salary, could be a good buy for just a few bucks, some analysts say. Shares in the New York-based company were trading at $4.23 on May 25.
Sirius shares hit a 52-week low of $3.60 on May 24 after larger rival XM Satellite Radio (XMSR) cut its forecasts for full-year subscriber growth (to 8.5 million subscribers from 9 million) and revenue amid soft retail sales of satellite radios in the second quarter. Sirius reiterated its outlook for more than 6.2 million subscribers by the end of 2006, and says it may book its first quarter of positive cash flow as early as the fourth quarter. Both stocks have skidded more than 40% this year, following double-digit percentage losses in 2005.
Sirius' depressed price means investors can now tune in for cheap, some analysts say. In a Mar. 8 report, Standard & Poor's analyst Tuna Amobi projected Sirius's subscriber rolls, which at last count was around 3.3 million, will swell to 9.8 million by the end of 2007, helped by Stern's arrival in January, 2006.
"We expect a significant rampup in the automotive channel over the next two years, and see retail sales increasingly benefiting from new portable products," wrote Amobi, who has a strong buy recommendation on the stock. Of the 33 analysts covering Sirius, 14 say buy, only one says sell, and the rest fall somewhere in the middle, according to data from S&P Equity Research.
Nevertheless, Sirius has to cut through some potential interference. For one, the rate of free-trial users becoming paid subscribers could slow, says J.P. Morgan Securities analyst Barton Crockett, who has a neutral rating on the stock. As auto makers increasingly offer satellite radio, "conversion rates are likely to drop, at least initially," Crockett wrote in a May 2 report. (J.P. Morgan Securities makes a market in the stock of Sirius, which is or was in the past 12 months a client.)
Another risk: Record labels could train their legal guns on Sirius. They've already slapped XM with a copyright-infringement lawsuit May 16, saying its "Inno" portable player should be subject to higher performance-rights fees because it can record and store music. Sirius struck a deal with the music industry for its S50 recordable device, but CEO Mel Karmazin has said the agreement won't necessarily extend to future devices. "That's mitigated by strong growth, and what we see as lower 2006 estimate risk for Sirius than XM," Crockett wrote.
2. Zap those ads. While pricing plans for TiVo (TIVO) bottom out at $16.95 a month, buying a share of the Alviso (Calif.)-based maker of digital video recorders (DVRs) looks like a bargain. Shares were trading at $6.41 on May 25, down from a 52-week high of $9.49 hit on Apr. 17 after a federal jury awarded TiVo $74 million in damages in its patent-infringement lawsuit against EchoStar Communications (DISH ).
That verdict was a huge win for TiVo, some analysts say, though opinions on the stock are mixed. While EchoStar's appeal could take years, TiVo has an opportunity to cut lucrative licensing deals with other TV operators, says Citigroup analyst Tony Wible, who has a buy recommendation on the stock. "TiVo could generate between $116 million to $260 million in cash flow from future deals," Wible wrote on Apr. 17, when he raised his target price by $6 to $15. (Citigroup Global Markets or one of its affiliates owns 1% or more of TiVo securities, and also makes a market in the stock.)
TiVo's stock has been stuck in rewind amid rising competition from generic DVRs and doubts about its business model. On May 24, TiVo posted a first-quarter loss of 13 cents a share, narrower than the forecast for a 19 cents loss (but wider than a one cent loss reported a year ago), while net revenue rose 20%, to $56.5 million. The company said higher marketing expenses and costs from its legal battle with EchoStar held down net income. The dispute with EchoStar is likely to drag on. On May 22, TiVo filed an injunction seeking to ban EchoStar from making or selling its DVR.
Still, TiVo stands to improve sales in the year ahead, analysts say. Service and technology revenues should rise 26%, to about $210 million in fiscal 2007, despite lower contributions from DirecTV (DTV ), says S&P's Amobi, who has a strong buy recommendation on the stock. He also believes the Apr. 17 verdict could increase the attractiveness of TiVo as a takeover candidate.
3. For adults only. (Disclosure: Hogan has contributed freelance articles to a Playboy publication.) The recent market downturn probably left Playboy Enterprises (PLA) shareholders feeling a little naked. On May 23, the Chicago-based adult entertainment company's stock dove to a 52-week low of $9.51. It's off 40.1% from a 52-week high of $15.88 touched on November 18, 2005.
But Playboy's famous bunny ears could still perk up, some analysts say. Shares edged up to $9.72 on May 25. A new publisher, as well as higher magazine prices and advertising rates, ought to restore the stock's luster, says S&P analyst James Peters, who has a buy opinion on the company.
While Hugh Heffner still has his smoking jacket and pipe, the company he founded has been forced to change with the times. On May 4, Playboy posted lackluster first-quarter earnings and issued a profit warning for the year, hit hard by lagging TV and magazine revenues. The U.S. adult-TV business "is seeing a fundamental shift," wrote RBC Capital Markets analyst David Bank a day later.
Other ventures could help keep Playboy's festive spirit going, though. The launch of subscription video-on-demand services may improve TV revenues, notes Bank, who has a buy rating but lowered his target price. Bank also thinks that delivering content via the Web and wireless devices should keep Playboy hot in the long term, despite short-term challenges.
The adult-entertainment industry isn't only risque, it's also increasingly competitive. Ironically enough, in this business it's what's inside that counts, according to Credit Suisse analyst William Drewry. "We are fervent believers in the mantra that 'content is king,' and we are confident that as long as Playboy continues to produce top of class content, consumers will find it and pay for it," Drewry wrote May 5, as he maintained an outperform rating and trimmed his target price. (Credit Suisse makes a market in the securities of Playboy and does or seeks to do business with companies covered in its research reports.)
4. Find a chip off a new block. Recent declines in emerging-market stocks pushed American depositary receipts in Taiwan Semiconductor Manufacturing (TSM ), or TSMC, below the $10 mark (see BW Online, 05/23/06, "Emerging Markets Beat Quick Retreat"). Hovering around $9.43, the stock is down 17% from a 52-week-high of $11.37 set May 8.
While the stock could be weak for the time being, some analysts think the Taiwan-based chipmaker has brighter long-term prospects. James Holtzman, a financial adviser and certified financial planner at Pittsburgh-based Legend Financial Advisors, says TSMC is the only stock under $10 in its clients' portfolio. He points to earnings growth projections of 40% for 2006 and 20% over the next five years, along with a price-earnings ratio of 14.5, compared to an industry average of 28.3. "This company has a lot of exposure to the Asian economy," he says. "We like that factor, as well."
On May 22, Morgan Stanley analyst Sunil Gupta maintained an outperform rating on the stock. Gupta trimmed his price target from $12.60 to $12 to reflect a bigger than expected inventory buildup. However, he thinks TSMC should gain market share this year thanks to new product launches in the third quarter. "We expect the stock price to decline by 5% to 8% in the near term and then eventually increase by 25% (including dividend yield) from the lower level," wrote Gupta in a report.
S&P analyst Vincent Ng has a buy recommendation and $12 target for TSMC. He cited rising rates of plant utilization and anticipated industry-wide growth of 12% this year.
5. Catch a wave. Telecom-equipment maker Powerwave Technologies (PWAV) is another stock that has dipped below $10. Shares were trading at $9.83, down from a 52-week high of $15.76 on Mar. 6. The culprit? On Apr. 3, the Santa Ana (Calif.)-based company cut its first-quarter outlook, only to disappoint the Street again May 2 by posting a quarterly loss.
The slow start to 2006 was just temporary static, some analysts say. First Albany Capital upgraded the stock from neutral to buy on May 3, with a $14 price target, citing strong earnings projections for the rest of the year. (First Albany makes a market in the securities of Powerwave.)
Much of the first-quarter shortfall stemmed from seasonal weakness, which also hit competitor Andrew (ANDW), says Canaccord Adams analyst Joanna Makris, who lowered her target price to $15 on May 3. A sharp decline in sales to Cingular was another factor, says Makris, who maintains a buy recommendation on the stock. (Canaccord Adams makes a market in the securities of Powerwave and intends to seek or expects to receive compensation from the company in the next six months.)
Indeed, the recent pullback could give investors a chance to dial in at a lower price. Cingular is likely to boost its spending later in 2006, while Powerwave also does substantial business with Nokia (NOK ) and Siemens (SI ), according to Baird analyst Kenneth Muth. "We feel the stock has been oversold," Muth wrote in a May 3 note, maintaining an outperform rating and lowering his target to $15. (Baird makes a market in the securities of Powerwave and it or its affiliates either intend to seek or expect to receive compensation from the company within the next three months.