As anticipated, I have heard from all the theorists and purists taking me to task for my series on low-priced stocks. After all, there is no difference between a stock rising from $60 to $100 than one going from $6 to $10.
Of course when I point out that most $6 stocks have much lower market caps than most $60 stocks, and therefore take a lot less buying pressure to move to $10, I am accused of exploiting the small-cap effect and told that it has nothing to do with price. I stand convicted of such and my belief that investors like low-priced stocks. Looking for single-digit equities that have the characteristics of winning investments just makes sense to me.
Today, I broke out the basic screen based on Walter Schloss's stock-picking criteria and isolated a few names trading below $10. You may recall that Schloss built his almost 50-year track record of investing success by buying companies with strong balance sheets for less than book value when they traded near multi-year lows. He is also a big fan of "skin in the game" and prefers to invest in stocks where management has a significant stake in the company.
While the resulting list is very short, after six years of a bull market there are some intriguing buys on the list. EZCORP (EZPW) is a company I have had my eyes on for some time. It is in the pawn shop and payday lending business, with locations in the U.S., Mexico and Canada.
EZCORP has delayed its 10-Q filing for the 2015 second quarter for a review of some aspects of its Mexican loan portfolio, causing a lot of folks to exit the stock until the smoke clears. While I am inclined to avoid buying the shares until investigations are complete and the 10-Q is filed, it's worth watching. Insiders have about $40 million of their own money on the line and I suspect they are as anxious as everyone else to fix the problems and get back to business. This is a very high-return business with enormous potential for further American expansion.
Fuel Systems Solutions (FSYS) also makes our list of single-digit cheap stocks. I am intrigued by the long-term possibilities of this company and have long suspected that if not for the advances in fracking technology over the past decade Fuel Systems would be talked about as one of the great growth stocks.
The company provides systems that allow internal combustion engines to run on propane and natural gas and if the government is serious about controlling greenhouse emissions this is one of the "when, not if" stocks. The company is undergoing cost controls and a restructuring to deal with lower oil prices that have dampened demand for its products, but its long-term future still strikes me as pretty bright.
I suspect that Fuel Systems will be one of those stocks that frustrates us for an extended period of time before eventually making a breath-taking move higher. In the meantime, the stock trades at just 73% of book value and has a solid balance sheet. Insiders own about 17% of the company so they have plenty of incentive to make sure it can survive until it thrives. Fuel Systems has been taking advantage of the current low valuation, buying back 1,424,814 of its shares year to date through May 1, 2015.
LeapFrog Enterprises (LF) has been one of the most frustrating stocks I have ever owned. The company has fantastic products but management has not executed well. Continued inventory issues, product delays and marketing issues are keeping profits at bay. To put it simply, someone that knows how to run the business should buy it and keep current management on an employment contract to develop the toys and games and let someone else handle the rest of the business.
The bright spot for LeapFrog is that it has plenty of cash and no long-term debt, so it should be able to hang around until it wakes up and sells itself to a larger electronics or toy company to maximize value. I am surprised that a smaller private equity firm has not seen the potential of LeapFrog and made a bid. At 50% of book value, the stock is cheap enough for a long-term bet on the company's strong educational product line-up.