The Market's 'March Madness' Underdogs

 | Mar 22, 2014 | 10:00 AM EDT
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"I think everyone roots for the underdog."

-- Johnny Knoxville

There is something uniquely American about the NCCA basketball tournament, the event known as March Madness. Although the Final Four are usually populated with teams that have some of the best basketball pedigrees in the land, little schools that have barely been heard of can also make a splash. This usually happens in the early rounds, but every now and again a Butler or Indiana State makes it all the way to the Finals.

These underdogs are what make the tournament so exciting and compelling. It is much the same in the market. Who doesn't want to own a small-cap tech company that ends up being the next Apple (AAPL), or a speculative biotech that morphs into the next Amgen (AMGN)?

In the spirit of March Madness, here are a couple of small-cap stocks selling for less than $5 a share that could make serious runs if everything falls right.

In the energy sector, one of my favorite small-cap exploration-and-production plays continues to be Abraxas Petroleum (AXAS). I have owned the stock since it traded at $2, and I still hold it here at $3.35. Abraxas Petroleum has acreage in most of the core shale-producing ranges in the U.S., including the Permian and Eagle Ford.

The stock managed a better than 5% gain on Thursday, even during that day's stock market debacle, as the company revised its production guidance upward. The shares also got upgraded at Global Hunter, which bumped its price target to $4.50 a share from $4 previously.

Earnings are projected to more than double this year on better than 25% revenue gain. The company has a solid balance sheet, has seen small but frequent insider buying and trades for around 10x this year's expected earnings.

Dynavax (DVAX) is a speculative biotech that could have a bright future. The company's lead drug is HEPLISAV, a phase III investigational adult hepatitis B vaccine. Adam Feuerstein stated in November that this could turn out to be the most effective hepatitis B vaccine in the market and have annual sales of $500 million to $1 billion.

Both the FDA and its European counterpart have asked for larger studies to provide additional safety metrics on this drug. This has moved back the timeline for approval to early 2016, as the company starts an 8,000-patient trial. The stock cratered last year on this news and touched $1 a share, but it has recovered nicely.

The company raised $125 million in a secondary offering last October. This should allow it to get through its large trials without the need to raise further funds. The company has a market capitalization of around $480 million. Obviously, if HEPLISAV is approved, the stock is going to go much higher.

The company also has products in its pipeline to protect the immune system, but the company's near-term fortunes will be driven by HEPLISAV. The company's CEO spent many years in executive roles at GlaxoSmithKline (GSK). Cowen stated recently that Dynavax has the potential to go to $8 a share.

Like most investors, I have tied up most of my funds in the perennial No. 1, 2 and 3 seeds of the market, such as Microsoft (MSFT) or ConocoPhillips (COP). However, just as the No. 12, 13 and 14 seeds can provide the most excitement in the NCAA tournament, they can do the same for your portfolio and warrant small speculative positions.

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