Favorite $2 Stocks in Turnaround Portfolio

 | Jul 16, 2013 | 11:00 AM EDT  | Comments
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Stock quotes in this article:

hpq

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bby

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cosi

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drad

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tst

I don't discuss small-cap stocks that often in these columns, but today I want to do something slightly different. I want to talk about three small-caps that are all coincidently selling near $2 a share.

All of these equities once sold in the double digits, but the companies hit some rough sledding and their stocks over time have slid precipitously. Sentiment is much too negative, however, on these equities and they have some catalysts that could be very rewarding to patient investors. They belong in what I call my "turnaround" portfolio.

As anyone that has watched Hewlett Packard (HPQ) or Best Buy (BBY) in 2013 knows, when sentiment turns on a long-time market laggard, a huge rise in stock price can happen in a relatively short time.

Cosi, Inc. (COSI) was one of my favorite sandwich shops when I lived in New York City. This fast-casual restaurant chain has some 75 company-owned and 50 franchised locations. At one time, COSI sold in the $30s but has been losing money for years. COSI has only a $43 million market capitalization. But the company has several things going for it. First, it has some great locations in major urban centers. In addition, approximately 30% of its market capitalization is represented by net cash on its balance sheet.

The restaurant chain also has a new CEO, who is starting to change the momentum of the company. Roth Capital, after meeting with the new management, recently said it believes the company can become profitable in 2014. Roth maintained its buy rating on the stock. An insider also has been scooping up shares recently.

The company could have major upside if it can get the menu and the value proposition right. If not, they could be acquired for their locations. I think it is a low risk/high reward stock at $2.40 a share.

My second turnaround play is an imaging solution provider to hospitals and family practices called Digirad (DRAD). The company has a market capitalization of under $50 million and over 50% of that is net cash. The stock is selling at less than 1x annual revenues and insiders have bought over 400,000 shares recently. In addition, the company's stock purchase authorization would retire over 20% of the stock at these price levels. Digirad should save 20% to 30% on annual operating costs once it completes its move to Atlanta from high cost California. Finally, the company has some $90 million of net tax loss carry forwards to offset profits in the future. The stock sells for less than $2.50 a share.

At risk of sounding like a total "homer", my last turnaround play is TheStreet (TST). In my defense, I had owned and written about the stock before I came to RealMoney. TST has a market capitalization of less than $65 million, of which some 70% is net cash. The company has made some management and business model changes recently that appear like they are starting to bear fruit. The stock has had strong buying from an insider recently, and the company is close to being cash flow positive. TST could have significant upside if it continues to make strides. Given its huge cash position, I see little downside at less than $2 a share.

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