Five stocks under $5 to consider

My core investment strategy of trading strong penny stocks (which earned me 197% last year) has clearly benefited from the overall market's strength of the past few days. While I'm looking at these following five names, I'm not rushing into them just yet. Each has a different story to tell:

Ferro Corp. (NYSE: FOE), a struggling industrial materials maker whose stock price has plummeted in the past six months from the $20s to $1, basically doubled to $2 after the company amended its financing agreement -- meaning its lenders gave it some breathing room.

This is good solid news, leading me to possibly buy here, but given the tough economic environment, extra funding might only put off the inevitable -- in the grand tradition of once mighty companies like Citigroup Inc. (NYSE: C) and Bank of America (NYSE: BAC). So I'll hold off from buying this stock right away.

Trucker YRC Worldwide (NASDAQ: YRCW) and shipper Dryships Inc. (NASDAQ: DRYS) have each seen their stock prices pummeled in the last year -- YRC dropping from the $20s to $1 and Dryship's stock becoming the laughing stock of Wall Street, crashing all the way from $100+ to $3. Now, each company has rebounded slightly, basically $1 a share off their lows, and I'm thinking about short-selling these stocks if they show any excess strength because both business models are broken for now.

More importantly, while this could very well mark the eventual market bottom, these penny stock rebounds, however slight, are due to investors' natural optimism and penchant for buying stocks after crashes, mistakenly believing that the odds favor great comebacks.

Unfortunately, most investors have not spent as many thousands of hours as I have pouring over penny stock after penny stock, gradually realizing that despite the appearance of great upside potential and only a small risk of downside, odds favor these stocks heading lower -- especially if we are destined for an L-shaped economic recovery.

And last I'll look at Fifth Third Bancorp (NASDAQ: FITB) and Huntington Bancshares (NASDAQ: HBAN). These are two failing banks whose stocks have been ravished -- both are trading in the mid-$1 range down from the teens. Both stocks have tried bouncing several times, failing miserably each time. I'm not going to buy or short sell either of these as it comes down to whether or not these banks are solvent, which nobody really knows, especially since we don't even know how to value larger financial companies like JP Morgan Chase & Co. (NYSE: JPM) & Keycorp (NYSE: KEY).

So there you go, this is how I look at stocks under $5. They're far simpler than successful companies, as their prices gyrate intensely based on the odds of them making comebacks. I love it and you will too, as long as you understand the rules.

Timothy Sykes writes the blog timothysykes.com, is a former hedge fund manager and author of An American Hedge Fund: How I Made $2 Million as a Stock Operator & Created a Hedge Fund.

Filed under: Citigroup Inc. (C), JPMorgan Chase (JPM), Bank of America (BAC), Bargain stocks, Chasing Value, Stocks to Buy, Stocks to Sell

Five stocks under $5 to consider originally appeared on BloggingStocks on Thu, 12 Mar 2009 13:00:00 EST. Please see our terms for use of feeds.

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