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Cheap stocks have an undeniable appeal because they offer investors the potential to score big returns.

Using MSN Money’s Deluxe Screener, columnist Harry Domash has identified nine companies whose shares are bargains now but have the potential to recover from the problems that sank their share prices in the first place.

Among the stocks that the screen turned up is RealNetworks (RNWK, news, msgs), the operator of the Rhapsody online music service. RealNetworks expects the biggest music companies will soon permit music to be sold online without copy-protection software. Today, music sold online comes with software that limits what users can do with the songs after they buy them. Songs purchased on iTunes, for instance, play only on Apple’s (AAPL, news, msgs) iPod music player.

The screen also identified Art Technology Group (ARTG, news, msgs), a provider of software and services that help about 600 companies do business online. The Cambridge, Mass., company last month announced a deal with apparel retailer Chico’s FAS (CHS, news, msgs), which plans to relaunch its Web storefronts for each of its brands using an Art Technology Group product suite.

Coeur D’Alene Mines (CDE, news, msgs) also made the cut. The company mines silver, gold, lead and zinc in the U.S., South America, Africa and Australia. Its plan to open a gold mine near Juneau, Alaska, this year sustained a setback last month when a federal appeals court indicated it would overturn a permit for the mine’s tailings dump.

Here is the complete list of stocks uncovered by the screen April 19.

Company	Industry	Previous day’s close
Art Technology Group (ARTG)	Internet software and services	$2.23
Coeur D’Alene Mines (CDE)	Silver and gold	$4.15
Netlist (NLST)	Electronic equipment	$4.34
Actuate (ACTU)	Application software	$5.73
TransAct Technologies (TACT)	Computer peripherals	$7.15
RealNetworks (RNWK)	Internet software and services	$7.66
STEC Inc. (STEC)	Data storage	$8.01
Website Pros (WSPI)	Internet services and products	$8.88
Silicon Image (SIMG)	Semiconductors	$9.11

The screen is based on the following parameters:

• A previous day’s closing price between $2 and $9.95 a share
• Average daily trading volume of at least 40,000 shares over the previous quarter, to weed out dead or rarely traded stocks
• A return on invested capital of at least 10%, to isolate companies with profits sufficient to support growth or reward shareholders
• A price-sales ratio of 8 or less
• Year-over-year revenue growth of at least 12% in the past 12 months
• Revenue growth in the previousquarter that’s at least 75% of the growth rate for the previous 12 months
• Forecasted earnings-per-share growth of at least 15% over five years
• At least 30% of outstanding shares held by institutional investors
• A mean recommendation by analysts of “hold,” “buy,” or “strong buy.”
• At least 30% of outstanding shares held by institutional investors
• No negative earnings suprises in the recent past

Domash cautions investors against expecting to score easy gains on cheap stocks, many of which got that way because market players spied serious fundamental problems that probably won’t go away. Thus, many are likely to get even cheaper.As a starting point for additional research, however, the screen offers investment ideas that can isolate profitable companies in the cheap-stock universe. For more details on the screening criteria, click here.

Source: articles.moneycentral.msn.com

Quote of the Day:
When someone says ‘it’s not about money’, it’s about money. – H. L. Mencken

H3Enterprises, Inc. (“H3”, “the Company”) has developed a powerful niche in three of the largest, fastest growing, and most profitable segments in the Entertainment Industry worldwide: Hip Hop Music, Video Gaming, and High Definition Flat Screen TV.

The Company (Symbol: HTRE) is led by Brian Peters, who has won top prize in Visa and Bank of America’s “Best New Business Concept 2004″. The company is also managed by Jackie Robinson, who landed a spot in Black Enterprise Magazine’s “Top 100 Business People” (#51). He has owned/operated 53 franchised Pizza Hut Restaurants.

Some of their product information:

• HipHopSodaShop
  The HipHopSodaShop is a unique restaurant concept that celebrates the skyrocketing demand for everything Hip Hop, complete with a healthy quick service menu, merchandising, memorabilia, giant LCD screens, and a large area dedicated to competitive Video Gaming.

• H3TV
  H3TV’s giant LCD Flat Screens will be featured throughout the HipHopSodaShops. The revolutionary screens will be utilized for music videos, live sporting events, audience participation “Open Mic Nites”, special sponsorships and promotions as well as cyber gaming action. H3TV is a multi-functional computerized television display designed to be the LCD flat screen of the “Hip Hop Generation.”

• HipHopHeaven
  Hip Hop Heaven serves up the absolute best meats, seafood, and salads available anywhere in a relaxed, but very entertaining atmosphere. Like in all H3 establishments, the latest and greatest in Hip Hop music, media, merchandise, and memorabilia will be featured.

Honestly, the stock’s perfomance in the past 6 months looks like a roller coaster. Demands for the stocks look very unpredictable, and both the volume and the price aren’t showing any trends at all. Even though the company is managed by a group of people who are referred to as “group of champions,” but I personally have my doubts when it comes to trading this stock.

The stock is currently traded at 6 cents/share (which is very cheap). So if you’re interested, you should consider getting them right now since I don’t think its price/share is going down any further.

Source: h3inc.com

Quote of the Day:
When someone says ‘it’s not about money’, it’s about money. – H. L. Mencken

They don’t cost much for a reason, but here’s the way to locate cheap stocks that might — and let’s emphasize ‘might’ — have a tremendous upside.

Cheap stocks, say stocks trading under $10, have an undeniable appeal: You have the potential to score big returns.

Say you hop on a stock with great fundamentals but languishing in the $5-per-share range. It’s not a stretch to imagine that stock doubling or tripling when it catches the market’s attention. It would be hard to achieve those sorts of returns with stocks like Google (GOOG, news, msgs).

Unfortunately, scoring big gains on cheap stocks isn’t easy. Most got cheap because market players spied serious fundamental problems that probably won’t go away. Thus, many are likely to get even cheaper.

Here’s a screen for spotting cheap stocks that have the potential to recover from the problems that sank their share prices.

It employs a tool — favored by the pros but neglected by most individual investors — to isolate the truly profitable companies in the cheap-stock universe and then pick the stocks in that group favored by the smart money. From those select candidates, the screen picks fast growers with the best chances of outperforming the market over the next few months. Here’s how it works.

Cheap — but not too cheap
I start by identifying stocks trading below $10.

Screening parameter: Previous day’s closing price <=9.95

There’s such as thing as too cheap. I rule out stocks trading below $2 because, in my experience, such stocks are very risky. Since I arbitrarily picked that figure, increase your minimum to as high as $5 if you want to reduce your risk.

Screening parameter: Previous day’s closing price >=2.00

Stock screeners sometimes include dead or rarely traded stocks in their results. You can avoid that problem by specifying a minimum trading volume, which is the average number of shares traded daily over a specified period.

Most stocks trade hundreds of thousands of shares daily, although small stocks get less attention and may only trade 50,000 or so shares, on average, daily. I require a minimum 40,000 shares average daily volume over the past three months. Since the lower the volume, the higher the risk, increase the minimum to 100,000 if you want to reduce your risk.

Screening parameter: Average daily volume last quarter >= 40,000

More than 1,100 stocks passed my price and volume tests. Next, I isolate the most promising suspects by employing a powerful profitability test.

Truly profitable
Simply reporting positive earnings doesn’t ensure that a company is making enough money to support its growth or to provide an adequate return to its shareholders. To judge that, you have to look at profitability ratios such as return on equity, return on assets or return on invested capital.

Of the three, you hear most about return on equity. However, return on invested capital (ROIC) is favored by many pros because it offers an especially insightful look at profitability.

Invested capital is what you’d be on the hook for if you bought the whole company. Return on invested capital is the return you’d receive on your investment if you did buy the company and paid off its debt.

What’s especially interesting about ROIC is that it tells you whether a firm can profitably employ borrowed funds. For example, a firm earning a 10% ROIC could borrow at the current 5% or so corporate bond rate and make a worthwhile profit. Conversely, a 3% ROIC company would pay more servicing its debt than it would earn on the borrowed funds.

Using MSN Money’s Deluxe Screener, I set my minimum allowable return on invested capital at 10%, double the rate most corporations currently pay for borrowed funds. Try lowering the minimum to 7% or 8% if you want to see more stocks.

Screening parameter: Return on invested capital >= 10

What’s it worth?
Valuation ratios describe the market’s expectations for a stock. Low valuations signal low expectations, meaning that most market players don’t like the stock. Conversely, high valuations connote in-favor stocks with high, possibly unrealistic growth expectations. These stocks typically suffer big losses when their growth falls short of expectations.

The price-earnings ratio (recent share price divided by 12 months’ per-share earnings) is the most widely followed valuation ratio. But reported earnings tend to be volatile from quarter to quarter, distorting the price-earnings ratio.

The price-sales ratio (recent share price divided by 12 months’ per-share sales) is a steadier gauge because quarterly sales don’t fluctuate nearly as much as earnings. Price-sales ratios range from 1 to as high as 20, and sometimes even higher. There is no hard-and-fast rule, but I’ve found that stocks with ratios above nine or so are risky bets.

I set my maximum allowable price-sales ratio at 8. Cut the maximum to 6 or 7 if you want to reduce your risk. Increase it to 9 or 10 if you don’t mind higher risk and want to see more stocks.

Screening parameter: price/sales ratio <= 8

Good to grow
Usually stocks recording strong earnings growth are the best performers. So, I isolate the best stocks in that department, starting with historical revenue growth, which, as I already mentioned, is a steadier gauge than earnings growth.

What’s sufficient in terms of historical growth is open to discussion. I specified a minimum 12% year-over-year revenue growth over the past year. Increase the minimum to 15% if you want to limit your list to faster-growing companies.

Screening parameter: Revenue growth year vs. year >= 12

While growth rates typically vary from quarter to quarter, it’s important to rule out stocks with declining growth. In an attempt to strike that balance, I require that the last quarter’s revenue growth must be at least 75% of the last 12 months’ growth rate. Given my arbitrary selection of 25% allowable fluctuation, modify it as you see fit.

Screening parameter: Revenue growth quarter vs. quarter => 0.75* revenue growth year vs. year

Next, I confirm that analysts expect the historical growth to continue. Since many investors look for at least 15% forecast earnings growth, I require that amount for expected long-term growth (we can’t screen for forecast revenue growth).

Screening parameter: EPS growth next 5 years >= 15

Stay in favor
Thanks to the huge trading commissions that they generate, institutional investors such as mutual funds and pension plans are privy to information that we’ll never see. If these big players don’t own a stock, we shouldn’t own it either.

The institutional ownership figure is the percentage of shares outstanding held by institutional investors. For in-favor stocks, percentages range from 40% to as high as 95%. Since they must invest large sums to establish meaningful positions, some institutions avoid cheap stocks. So I cut my usual 40% minimum institutional ownership requirement down to 30%.

Screening parameter: % institutional ownership >= 30

Stock analysts rate stocks as “strong buy,” “buy,” “hold,” “sell” or “strong sell.” The consensus ratings you see on MSN Money and other sites are simply the average of all analyst ratings for a stock.

Stock analysts are easy graders and award “strong buy” or “buy” ratings to most of the stocks that they follow. Thus, “sell” or “strong sell” ratings signal extra risk that you don’t need. Avoid such stocks.

Screening parameter: Mean recommendation >= Hold

No negative surprises, please
An earnings surprise is the difference between analysts’ forecasts and the quarterly earnings a company actually reported. It’s a positive surprise when reported earnings exceed forecasts and a negative surprise when earnings fall short. Positive surprises usually lead to higher share prices and vice versa.

Many research studies have found that stocks with recent negative surprises tend to underperform the market for several months, while those with positive surprises often outperform.

Screening parameter: Recent quarter surprise % >= 0

My screen turned up eight stocks, with all but one trading in the $5-to-$9 range. Surprisingly, seven of the eight are in the tech sector. However, they all serve different industries within the sector, and thus the picks are more diversified than they may first appear:

Art Technology Group (ARTG, news, msgs); recent price $2.16. Develops and sells Web site merchandising, sales and customer service software.

Actuate (ACTU, news, msgs); recent price $5.30. Develops and sells reporting and analytical software targeted mainly to large corporations.

Medifast (MED, news, msgs); recent price $6.66. Develops, manufactures and sells health and diet products online through network marketing and via doctors’ offices.

Netlist (NLST, news, msgs); recent price $7.26. Makes and sells memory products used in servers, routers and broadband switching systems.

RealNetworks (RNWK, news, msgs); recent price $7.70. Makes the ubiquitous RealPlayer digital media player that you probably have in your computer, as well as arcade games and other products for delivering digital content.

STEC (STEC, news, msgs);recent price $8.42. Formerly SimpleTech, makes memory products used in laptops, digital cameras and network routers.

Silicon Image (SIMG, news, msgs); recent price $8.74. Designs and markets digital video controllers and other video chips found in personal computers, set-top boxes, DVD players and other equipment.

Website Pros (WSPI, news, msgs); recent price $8.91. Provides software, design consulting, Web hosting and just about everything else a small or midsized business needs to implement a Web site.

This screen, like all screens, doesn’t know about everything you need to consider before buying. These are candidates worth investigating, not a “buy list.” The more you know about your stocks, the better your results.

Since the screener has an earnings surprise parameter, it makes sense to use it to avoid stocks with recent negative surprises.

Source: articles.moneycentral.msn.com

Quote of the Day:
The only thing wealth does for some people is to make them worry about losing it. – Antoine de Rivaroli

By Tim Hanson (TMF Mmbop) and Brian Richards (TMF Brich)

Penny stocks have huge potential — that’s their blessing and their curse.

The potential rewards are enormous. Just take a look at what happened at Prana Biotechnology (Nasdaq: PRAN) over the summer — the stock more than doubled after some positive clinical data concerning the company’s PBT2 compound.

That $2 double looks like an easy gain, considering that White Mountains Insurance (NYSE: WTM) would have to add another $536 in value to double its share price, and Markel (NYSE: MKL) would need to throw another $394 on the fire to eke out another double.

Everybody loves pennies
It’s the potential of quick gains in stocks like Prana that keeps investors coming back. We typed “penny stocks” into Google and the search engine spit out “about 2,080,000″ hits. We did the same for more time-tested terms such as “blue-chip stocks” and “dividend-paying stocks” and got just 386,000 and 193,000 hits, respectively.

Sure, we expected a discrepancy, but the size of the gap was startling. It became even more interesting when we broke those hits down with Google Trends. According to Trends, penny stocks are particularly alluring to investors in Orlando, Las Vegas, Oklahoma City, Tampa, and Calgary — the locales where the term is most often searched.

Las Vegas, for one, makes a bit of sense. Those folks are gamblers.

Florida, though? Well, we hope the folks Googling “penny stocks” down there aren’t retirees.

This stock is set to take off! Or not.
According to the Securities and Exchange Commission, the term “penny stock” generally refers to low-priced (below $5), speculative securities of very small companies. To quote the SEC: “Investors in penny stocks should be prepared for the possibility that they may lose their whole investment.” (It’s worth noting that the emphasis in that last sentence is in the original.)

Pay attention to the SEC’s entire definition, not just the stock price. Going solely on price would wrongly categorize billion-dollar companies such as Sycamore Networks (Nasdaq: SCMR), Coeur d’Alene Mines (NYSE: CDE), and Solectron (NYSE: SLR) as penny stocks.

Regardless, the SEC is spot-on when it says that true penny stocks are among the surest ways to lose money in the stock market.

Well, then, why do we “love” penny stocks?
We love penny stocks because they’re fascinating. The world of pennies is inhabited by hardworking average Joes hoping to strike it rich, pumpers and dumpers, hypesters and scammers. In pennies, the logic and reason that applies in the rest of daily life is replaced by zeal and prayer.

However, we don’t love them enough to actually buy them. Yes, they have big potential. But their daily gyrations are unpredictable — the stock price movements have next to nothing to do with the underlying company the stock represents. In fact, trading in pennies is highly illiquid, and prices are often manipulated by forces not at all related to the business.

The dangers of incredible promises
If you’re buying stocks without paying attention to the business you’re buying, then you might as well be buying a lottery ticket. Or (to use another analogy) you might as well buy up every baseball card of a benchwarmer on the Akron Aeros AA baseball team, and hope that he someday rises up, fulfills his potential, and becomes an all-star for the big-league Cleveland Indians.

There’s a better way
Before you start saying the rest of the stock market is boring — with big stocks such as IBM having a “big day” when they move up 1% or so — let us introduce you to some underfollowed small caps. They’re nothing like penny stocks, yet they still offer some of the best returns on the market. Unlike penny stocks, promising small caps:

• file reliable financial statements
• are transparent
• have conference calls individual investors can listen to
• don’t simply hype their stock in press releases

That’s a starting point. There are more — and more important — criteria to help you find great small-cap companies. Our team at Motley Fool Hidden Gems, for instance, looks for a balance sheet with lots of cash and no debt, and a tenured CEO (or CEO/founder, if possible) who holds a substantial ownership stake in the business. In other words, we’re looking for big returns with good, old-fashioned, bottom-up analysis.

You can view the more than 50 small caps our team has already found with a free 30-day trial. There’s no obligation to subscribe, and we particularly recommend it for the penny stock-o-philes reading in Alberta and Florida. You know who you are.

Source: fool.com

Quote of the Day:
Good bankers, like good tea, can only be appreciated when they are in hot water. – Jaffar Hussein, Governor, Malaysian Central Bank

Dear Nancy Woods:

My close friend told me about a penny resource stock that he made a lot of money on. He wants me to invest in it, too. He says he thinks it could still double in value. What should I do?

Penny Shy

Dear P.S.:

Your friend could very well have made a lot of money on his stock and wants you to benefit. However, past experience has taught me that people will often tell you about their winners, not their losers. Rarely is someone eager to tell you how much money they lost while speculating on junior resource stocks. It would mean they made a mistake.

My words of caution are to remember you would be buying after the stock has made a significant move and you can never be sure of the future upside. Consider buying an amount that you can afford to lose so it won’t be disastrous if the price goes down. If your friend is right and the stock price does double, you will be happy you bought and made some money, even if it is not enough for you to retire on. These types of stocks are very speculative and not for everyone. Manage your expectations and you won’t be disappointed.

Dear Nancy Woods:

There has been lots of press about income trusts and the possibility of change in how these investments are taxed. I own a number of these. How could I be affected?

Trusting Investor

Dear T.I.:

The recent announcement by BCE that it will convert itself into an income trust has raised the awareness of the loss of tax revenue to the federal government. You can be sure the government is watching this closely and that this deal raises the probability of a change. The opinion of RBC’s Portfolio Advisory Desk is in the past, these tax rumblings hardly affected REITs and oil and gas trusts. You should review your income trusts and do a careful analysis with your advisor to fully understand the underlying businesses of these trusts. Pay extra attention to business trusts that may be more susceptible to changes — if there are any taxation changes.

Source: canada.com

Quote of the Day:
There is only one boss. The customer. And he can fire everybody in the company, from the chairman on down, simply by spending his money somewhere else. – Sam Walton, founder of Wal-Mart

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