Welcome to Breakout Stocks Under $5!

I think that name says it all, which is the way I want it. I’m a no-nonsense gal when it comes to my investments, so let there be no doubt about what we’re going to do together – make our money in, say it with me now, breakout stocks under $5.

I have spent most of my life uncovering and investing in these kinds of stocks – starting back in high school when I began to invest and for the last 25 years as a professional money manager. I can tell you from firsthand experience that lower-priced stocks are a great way to build – or rebuild – your wealth quickly.

It’s simply easier for a $5 stock to go to $10 than a $50 stock to go to $100. And if that $50 stock does make it to $100, it will likely take a whole lot longer.

Here’s what has me really excited: Now is just about the perfect time to invest in lower-priced stocks. Why? Because there are so many of them! I’m not trying to be funny; it’s the truth. The devastating recession, financial crisis and bear market of 2008 combined with the recent sell-off have dragged all kinds of stocks down under $5.

That means we have an unusually high number of exciting opportunities available. There are dangers as well. Many stocks under $5 are cheap because they deserve to be. They are dogs that never had potential, were permanently damaged by the recession, or have misstepped so badly they have no hope of getting back on the right track.

Others, however, are poised to break out dramatically. They may be excellent companies that investors sold just because they were selling everything else – the proverbial baby that was thrown out with the bath water. Or they may be companies engaged in dramatic turnarounds that will soon catch the attention of investors. Or maybe a brand new company with incredible potential that hasn’t been discovered yet by Wall Street.

Breakout stocks can come in all kinds of shapes and sizes, but we are interested in the three things they all share: 1) They are low-priced (mainly under $5); 2) undervalued; and 3) have specific catalysts in the near future that put them on the threshold of breaking out to much higher prices. When they do, the snowball effect kicks in as institutions climb on board and drive the price even higher. That’s when we make a lot of money – and potentially a whole lot of money.

The key, of course, is to figure out if a stock is truly a breakout stock or a broken stock, and that’s what I will do for you here in Breakout Stocks Under $5. As I mentioned, I have been doing this a long time and have developed a bit of a reputation for finding these stocks and riding them to big profits. There is nothing better than bringing home double- and triple-digit gains in a relatively short period of time.

That’s why I can’t wait to get started earning these kinds of profits, and I know you can’t either. In just a moment, we’ll go through my top three recommendations right now.

Before we do, let me take a moment to extend a very special welcome to those of you joining us from the Penny Stock Winners investing service. I know Jamie has done a terrific job picking some nice gainers for you, and we will continue to follow his recommendations as long as we still see opportunity. I have analyzed all of his stocks and will give you my specific advice on each very soon. (In fact, I recommend you take advantage of the recent surge in one stock and lock in profits now. I’ve posted the details for you on our Breakout Stocks blog. Click here to read it now.)

We have a lot to talk about in this Premiere Issue, so let’s jump right in to the kinds of stocks we’ll be investing in and the tremendous profits they can generate.

So, What’s a Breakout Stock?

When I’m looking for a true breakout stock under $5, I need to see the potential for at least 50% upside and preferably more. I would say 50% to 200% in the coming six to 24 months is a good general expectation, but some will certainly move higher and faster than others.

Finding these stocks takes hours of research, investigation and analysis, and I love it. I get to be a detective, a business scholar, an investment analyst, a trader and a secretive hedge fund manager. I talk to people in the field, travel around the globe to see a company’s operations and outthink the herd mentality on Wall Street that seduces you into buying high and selling low.

That’s especially true when it comes to low-priced stocks. Here’s the catch: As a stock’s price falls, the downward spiral becomes a self-fulfilling prophecy because Wall Street’s analysts won’t cover low-priced stocks. Then, to make matters even worse, nearly all large institutions shy away from buying stocks under $10 and certainly under $5.

This is where opportunity and danger meet, and it’s why for any stock to pass muster, I must have immense conviction that the company has what it takes to dig itself up and out of the “under $5” category. And when it does, that’s when the excitement really kicks in. An upward spiral becomes a self-fulfilling prophecy as institutions start to both cover the stock and invest in it, which accelerates the breakout.

Big Breakout Winners

As I mentioned, breakout stocks come in many shapes and sizes, but they are generally either little-known stocks with a great new product or a company that has fallen on hard times but is righting the ship. Let me give you a few examples of each.

Dendreon (DNDN) was on Wall Street’s garbage heap (which I search through) because it had burned money managers once before. The company makes a potentially revolutionary new cancer treatment – a vaccine made from the patient’s own immune cells. The company was confident it would receive FDA approval for its drug, but that approval was unexpectedly denied in 2007. Wall Street, feeling spurned, dumped the stock and walked away. DNDN plummeted from $19.40 to just over $2.60 by May 2009.

That’s when I got interested. After extensive research and checking with my contacts who really understood the drug’s revolutionary potential and likely approval in the future, I jumped in and bought. Just two months ago, Dendreon did receive full approval and the stock more than doubled in a mere four months. As for me, I had a ten-bagger on my hands. I purchased on March 12, 2009 at $3.42 and locked in those gains on April 30, 2010 at $54.43 for a profit of 1,491%!

The other category of breakout stocks is those that have been beaten down but are spring-loaded and ready to pop back up. Stocks often take a pounding when a company takes its eye off the ball, becomes too unruly to control, grows recklessly or strays from its core competency. Exogenic events such as recession, environmental disaster or even an act of terrorism can also cause the whole edifice to crumble.

But certain companies have what it takes to climb out of the deep abyss – innovation, fortitude, skilled management – and those are the stocks that can break out.

Citigroup (C) is a perfect example of a once great high-flyer that fell on hard times. (Many of the stocks we invest in will be new to you, but you will also see some well-known companies.) What had once been one of the premier global banks, known for its quality management and strict risk controls, found itself transformed into a mediocre financial supermarket–which was then in the eye of a historically severe credit crisis.

As we know, this was disastrous for Citi. Eventually, the stock dove from $55 down under $1! It may have been overvalued at $55, but I knew there was no way it was a $1 stock. The government wouldn’t and couldn’t let Citi fail, and there were still very strong and lucrative areas of the bank that could drive profitability in the future. I bought the stock on February 23, 2009 for $1.49 and sold on August 24, 2009 at $5.23, a nice 251% return in just two months.

I have also found great opportunities when an entire sector is left for dead because I can pick out the best companies and ride them up. These might be broken stocks but not broken companies, and that disconnect won’t last. My favorite example here is Priceline.com (PCLN).

When the tech bubble burst, it took down a lot of garbage that deserved to be thrown away, like Pets.com. However, there were a handful of preeminent and formidable businesses with phenomenal potential that were also taken out to the woodshed just because they were dot.com companies. Priceline went from $279 on June 2, 2000 to under $8 by the end of the year. Ouch!

The stock was left for dead, but I knew Priceline was a solid company with an innovative business model that could actually work. While on the road analyzing companies, I would notice that Priceline was becoming a standard and acceptable means of booking travel at a discount. Wall Street missed the boat, but then again, much of Wall Street was out of touch and still using the expensive and outdated traditional travel agencies.

I knew online booking wasn’t going to disappear and, eventually, the market would consolidate around a winner. I bought PCLN on February 3, 2003 at $7.50 per share. I have sold some of my shares over the years to lock in profits, but I still have a position in the stock and have enjoyed an upward run of more than 2,000%.

I hope that gives you a sense of the kinds of opportunities we will be going after. The pickins’ are rich right now, so let’s get right to the stocks I want you to start with.

3 Breakout Stocks to Buy Now

If I asked you to pick THE one sector that has been beaten down the worst, what would be the first answer to come to mind? I suspect most of you would say “financials,” and you would be right. After all, the whole system darned near collapsed. We’ve come a long way since the days of Bear Sterns and Lehman Brothers disappearing, but the landscape of the entire industry has been forever changed, and the dust is still settling two years later.

Some of the best opportunities out there are buried in this dust, including the first three stocks I want you to buy now.

PMI Group: Primed for Payoff

When you think about the root cause of the financial debacle of the last few years, one word jumps out: mortgages. Too many loans; too little collateral; overaggressive lending. All played a part.

However, with the economy now improving, the U.S. housing markets are beginning to gain a firmer footing. As sales increase, companies offering protection to the lenders – who need to reduce the number of defaults to survive – are now in a position to rise from their lows. Enter PMI Group (PMI).

PMI stands for “private mortgage insurance,” which is an integral part of the residential housing market. Mortgage insurance protects lenders and investors against default for loans in which the homebuyer’s down payment is less than 20% of the total price.

That’s essentially what PMI Group does. It offers mortgage insurance products to meet the capital and credit risk mitigation needs of its customers, who are primarily mortgage lenders, depository institutions, commercial banks and investors.

PMI is a major player in this market. For 2009, they reported revenue of $923.9 million, total assets of $4.6 billion, and over $114 billion of primary insurance in force. But the brutal market conditions had a significant impact on recent performance, resulting in a consolidated net loss of $659.3 million for the year.

Management has actively changed the business during the swoon, which is critical to my belief that better times are just around the corner. In 2008, they sold their Australian and Asian operations and they’ve ceased writing new business in European and Canadian operations, leaving them primarily focused on U.S. mortgage insurance. Due to the changing economic and industry conditions and to help bolster its capital position, PMI changed its underwriting guidelines and customer management strategies in 2008 and 2009, all of which limited PMI’s new business writings in 2009 and into 2010.

These changes laid the foundation on which to build, and I believe the company is now approaching the next phase of its turnaround.

Stepping In Where the Government Steps Out

The government has been a major backer of the housing market as it has recovered. With government agencies underwriting lots of new mortgages, private mortgage insurers like PMI have been pressured.

But we all know the government won’t be able to prop things up forever, and it has already begun backing out. At the end of March, the Federal Reserve ceased its $1.25 trillion mortgage-backed securities (MBS) purchase program. As this process continues, PMI will be in “prime” position to capitalize from the sector’s renewed growth.

We’re already seeing signs of that growth. According to PMI Group’s Second Quarter 2010 Risk Index, there’s fresh evidence of recovery in the nation’s housing markets with the risk of continued price decline shrinking in most major metro areas. The report finds that 93% of 384 metropolitan statistical areas (MSAs) showed declining risk scores in Q4 2009 compared with the previous quarter, while only one rose and the rest remained unchanged.

David Berson, PMI Chief Economist and Strategist, called this “a significant change in the outlook for lower house prices.” He added that “housing affordability continued to climb, and in some MSAs is at or near record levels. House prices have dropped sharply relative to incomes in most areas suggesting that prices have fully, or more than fully, adjusted for their unsustainable increases during the housing boom.”

Add to that mortgage rates near historic lows and you’re bound to attract homebuyers. The recent pick-up in home buying activity is a key catalyst for PMI’s business and shareholders. According to the National Association of Realtors, sales of single-family homes increased 7.4% in the month of April and are up 21% in the past year. Sales of condos have also increased – up 9.1% in April and up 42% in the past year. And, nationally, the median home price rose 4% in the past year to $173,100.

A Possible Double

The end of this March and the first part of April saw PMI shares rise strongly from just over $2 to an intraday high of $7.75. However, the stock shares later dropped after the company announced plans to offer common stock and convertible senior notes. This was on top of reporting a first-quarter loss from continuing operations of $1.90 per share, which was steeper than analysts expected.

However, the offering was a good and necessary move. From it, PMI Group received aggregate net proceeds of approximately $706 million, bringing its risk-to-capital and minimum policyholders’ position well within required levels for mortgage insurers, and importantly, allowed them to continue writing policies in all 50 states. (Not alone in dealing with the tough market conditions, competitor Radian Financial also reported similar earnings losses and capital raising, pressuring the entire group.)

I believe that the bottoming of the housing market, the company’s operational performance and, ultimately, PMI’s price well below book value make this a must-buy stock. We are already seeing some signs of support for the stock in recent options plays that indicate investors do not see the stock falling back to the $2–$3 range. Also important are reports showing improved payments by borrowers, helping mortgage insurers as a whole.

Wall Street hasn’t yet caught on to the turnaround. Only six analysts cover PMI, with four rating it a “hold” and two an “underperform.” On the earnings front, consensus earnings project a loss of $4.59 per share for 2010, improving substantially to a loss of only $1.29 next year. Forward growth estimates are impressive at 42.2% for this year and 71.9% next year.

I think now is the time to buy PMI. Its business is improving and the stock has strengthened, so downside risk is much less than it was even a few months ago. But it hasn’t broken out to the upside yet, which I expect will happen as the housing market continues to strengthen and the government unwinds its unprecedented support of mortgages. Buy PMI under $4.80. I’m targeting $10.00 or more by the end of next year.

Synovus: Returning to Profitability

Not all of the pain during the financial crisis was limited to Wall Street. The financial and banking industry nationwide was hammered, with a number of regional banks being hit particularly hard with their extensive exposure to housing and commercial loans. Once again, certain companies are rising from the ashes and heading for a breakout. One is Synovus (SNV), a beaten-down, under-appreciated yet strongly recovering regional bank.

Synovus Financial Corp. is a financial services holding company with approximately $33 billion in assets. Based in Columbus, Georgia, the company provides commercial and retail banking, as well as investment, financial management, insurance and mortgage services, to customers throughout attractive Southeast markets in Georgia, Alabama, South Carolina, Florida and Tennessee.

After all the turmoil of the past few years, Synovus has solidified itself and its market position. The bank is the sixth largest in the Southeast, as ranked by customer deposits, and I especially like that it is focusing on its traditional community-based, customer-service banking model while some competitors remain distracted with management-intensive reorganizations and merger integrations.

Climbing Out of the Credit Hole

As you would expect, the company’s results have been depressed in recent quarters but are beginning to improve enough to get me interested. The latest results from the first quarter showed a loss of $0.47 per share, which beat estimates by $0.02. Importantly, for the fourth consecutive quarter, non-performing asset inflows declined for the fourth consecutive quarter, which management believes to be the best predictor of future credit costs.

One well-reported problem for Synovus that has no doubt pressured the stock has been its $220 million exposure to the Sea Island resort in Georgia. It’s been classified as non-performing and has been written down. However, reports indicate that Goldman Sachs is marketing the property and there’s been strong interest. A disposition of Sea Island this year would eliminate this major component of Synovus’ non-performing assets and the need for any further write-downs.

Credit quality is definitely improving. Management reported at its annual meeting that quarterly net charge-offs (annualized) were down to 5.05% in the first quarter, down from a peak of 7.33% in Q3 2009.

Management expects credit costs to keep declining and capital ratios will exceed current regulatory standards as the company’s capital position continues to strengthen. With the expected decline in credit costs, which will drive a reduction in the loan loss reserve, management expects significant profit improvement in 2010.

Synovus is also working to consolidate its 30 different bank charters into a single one. Though this will impact deposits because of reduced FDIC insurance limits, significant cost savings benefits will improve capital efficiency and increase opportunities for other efficiencies.

I’ll spare you the gory details of all the other banking metrics I’ve dug in to. The important point is that they all show conditions are improving. This along with management’s continued focus on keeping expenses low leads them to believe the company will return to profitability before the end of this year.

Getting In Before the Street

Like most financial stocks, Synovus took a pounding the last few years. SNV had a precipitous fall at the end of 2007 from almost $15 to around $10. It dropped again a year later and fell below $5 in early 2009, where it has remained since. The stock built a base after bottoming below $1.50 at the end of 2009 before bouncing to almost $4. It has since fallen back to around $3 in the recent selling over European debt fears.

On an historical valuation perspective, SNV looks cheap. Financial stocks typically trade at anywhere between 2X and 3X book value; SNV has even traded well above that range. Currently, however, the stock trades well below book value (0.52 price-to-book ratio as of June 1).

Given the recent performance, Wall Street analysts remain mixed on the outlook for SNV. Eleven of the 23 covering the stock rate it a “hold,” seven rate it “buy” or “strong buy,” and five rate it “underperform” or “sell.” That gives us our chance to get in before the analysts jump on board. With the outlook continuing to improve for SYN, future Wall Street upgrades would provide another important catalyst for the stock.

Synovus is among the group of small- and mid-sized regional banks that fell the most during the credit crisis. Not all are bouncing back. But those that have taken the steps to address their capital position and exposures like SNV are starting to recover, and with such a low valuation, stand to make strong gains from current prices.

The improving trends in credit, specifically fewer problem loans and lower net charge-offs, will reduce the company’s loan loss provision – what the company sets aside to cover bad loans. After ballooning in the second quarter of 2009, this quarterly provision has been declining, and I expect that to continue for the balance of this year and next. Less money set aside for bad loans will have a significant impact on earnings, driving the company back towards profitability.

Synovus might report losses for another quarter or two, but the company looks close to really turning the corner. With credit costs falling, I anticipate strong growth in earnings later this year. Buy SNV now while you can get it under $3.15 before the positive momentum kicks in. And when it does, SNV could easily double or more from here.

Cowen: A New and Improved Seasoned Veteran

The third breakout stock I want to introduce you to takes us back to Wall Street. Cowen Group (COWN) is an investment bank that has actually been around over 90 years, so it is a real veteran of up and down cycles.

As with PMI Group and Synovus, Cowen has strong upside coming out of the recent down cycle.

I’ve recorded a special video to tell you more about my analysis of Cowen, and I invite you to watch it now:

Let me also summarize for you the reasons to own COWN now:

• The business is on solid financial footing.Cowen ended 2009 with over $470 million in equity and only $25 million in debt.
• Strong gains across key businesses – including M&A, capital markets and asset management –all position the stock for significant upside potential over the rest of the year.
• The stock is clearly undervalued and is trading under book value because of all that has happened in the financial sector.
• One intangible I always look for is management, and Cowen has real strength here. The firm is led by veteran bankers Tom Strauss and Peter Cohen (former CEO of Shearson), who has a reputation as a real dealmaker, a huge asset in the relationship-driven world of investment banking.
• Cowen’s Ramius funds have had a strong record, compounding at 17% since inception.
• Possible takeover candidate at what would be a substantial premium.

I recommend you buy COWN under $4.95 for a first target of $7, but I look for the stock to eventually hit $10.

The Journey Begins

Before we wrap up this month’s visit, let me tell you a little bit more about what to expect in the coming days and weeks as we get started together here in Breakout Stocks Under $5.

I know heightened volatility in the market may have you a little concerned, and that’s understandable. Lower-priced stocks in particular are more volatile by nature. A 50-cent move on a $5 stock is a lot different than a 50-cent move on a $20, $30 or $50 stock. That’s why buy limits are so important in these stocks. I put a lot of thought and analysis into identifying good entry points, and I urge you to adhere to the prices I recommend.

Of course, the flipside of this is what gives us our opportunity. Lower-priced stocks don’t have to move as much on a price basis to generate a nice percentage gain.

Rest assured that I will be watching our stocks and the market very closely every single day. Much of the volatility we will ride out because it doesn’t affect our investments. Other times, we will act quickly – to sell if a problem has surfaced or to pounce on an opportunity that has been presented to us.

I will always let you know exactly what to do, and there are several important ways we will stay in touch so I can keep you up to date.

In addition to your monthly issues, I will email Flash Alerts directly to you anytime there is urgent news or buy/sell advice that you need to know about right away. I also want to make sure you know about our Breakout Stocks blog, which I invite you to check often. I’ll post frequent updates there about the latest developments with our stocks, thoughts on the market as a whole, answers to your questions, and other important information.

Looking ahead, we have more exciting things planned for the web site, including video updates and interactive message boards, which will give us the opportunity to talk to each other and give you a chance to talk with your fellow Breakout Stocks subscribers.

If you are coming to us from Penny Stock Winners, I will have full updates on all the stocks you’ve been following in the coming days. As I mentioned earlier, there is one stock I recommend you sell now after its recent jump, FSI International (FSII). I have more details for you on the blog.

Most important of all, let me say once again how delighted I am that you have joined us. I can tell you from firsthand experience that investing in breakout stocks is not just profitable, it’s also a lot of fun. And as we talked about earlier, you’ve picked a great time to get started.

I hope you’re as excited as I am about what’s to come!

Until next time,

Hilary Kramer

Editor, Breakout Stocks Under $5