More Single-Digit Prospects From Value Line

 | Sep 15, 2011 | 12:30 PM EDT
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Yesterday I started looking at stocks that are priced below $10 a share and receive the top ranking form the Value Line system. Over the years, this has been a top-performing screen, and it is the only approach besides deep value that I would even consider using as a full-time approach to managing money. The screen's picks can be volatile, but they have returned just about twice the market over the past 20 years.

When I ran the screen yesterday, I found that 51 stocks met its criteria. That's the most in quite in some time, and this could indicate that the smaller-cap growth and turnaround stocks are oversold. I also noted that 11 single-digit stocks had the very highest ranking for year-ahead price performance. That is a very high percentage of top-ranked, low-priced issues, and I decided it was worth some time to investigate more of these names.

I have looked at Celestica (CLS:NYSE) before and have a small position in the stock. The contract manufacturer is one of those companies that got hurt by disappointing results from Research In Motion (RIMM). The BlackBerry manufacturer is a major client of Celestica, and its slowdown hurt the bottom line and the stock price. The company also has one plant in Japan near the earthquake-ravaged areas that fortunately did not suffer serious damage.

Celestica has been taking steps to diversify its customer base. It recently purchased the semiconductor business from Brooks Automation (BRKS) to expand further into those markets. More electronics companies are expected to look to outsourcing manufacturing to reduce costs, so the outlook for Celestica is fairly bright for the next few years. The stock trades at about 1.2x book value and has an enterprise-value-to-EBITDA ratio below 5. Looking out five years or more, it is easy to see this being a top-performing stock for long-term investors.

A pair of hospital stocks makes the list. Tenet Healthcare (THC) has had a difficult time over the past several years as a weak economy and regulatory issues have pressured the shares. The company recently lowered its guidance for the year as it continued to see profits constrained by uninsured patients, and declining reimbursement rates hurt the bottom line. It is hoped that the provisions of last year's health care reform eventually stem the tide of uninsured patients. The company has already fended off one takeover effort, and another offer for Tenet would not be a huge shock.

Health Management Associates (HMA) has struggled with some of the same issues. In addition, the hospital operator has been hit with subpoenas from the Department of Health and Human Services. The inspector general of the agency is seeking information in joint venture ownership, physician referral practices and the usage of Pro-Med software in the emergency rooms. Although it makes great headlines, I do not believe the investigation will amount to much, and it is similar to those conducted recently at other hospital operators. Health Management has been taking advantage of industry weakness to make acquisitions and should see decent growth over the next few years.

The Value Line system is bullish on a stock I have never been able to embrace. Vonage Holdings (VG) offers voice-over-Internet phone services, and almost all of my experience with the company has been poor. I do not know anyone who has ever used the service and been happy with it. However, the company is seeing subscriber growth, and the international offering is being very well received.

Vonage has introduced mobile offerings and has more on the way. The company has been reducing debt and interest expense, and that should also be a huge plus for the bottom line. Refinancing their remaining debt could cut interest expense almost in half going forward. If the company continues to upgrade its services and expand into international markets, the stock could be a home run for long-term aggressive investors.

This systematic approach to buying turnarounds and small growth companies has been a winner over the years. You have to be able to live with high volatility, but if you make Mr. Market work for you, the high volatility of this approach could actually be a positive.

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