3 Stocks Under $12 Set to Double
Whether they're undiscovered gems, damaged goods or in little-understood businesses, these stocks have oodles of upside.

I love a bargain, whether it be in a store, online or in the stock market. I particularly like low-priced stocks because they allow me to take a substantial position in companies whose stories I really like. Many times these are just undiscovered gems, or businesses nobody really understands, or they have a stink on them from some previous event but are engaged in a turnaround.

Tenet Healthcare

That last situation describes Tenet Healthcare (NYSE:THC). Tenet owns 49 acute-care hospitals around the country, along with interests in an HMO and a management services subsidiary (in other words, insurance services). It’s a nicely rounded health care play and, as we know, people always are going to get sick.

Tenet Healthcare is not going gangbusters, but it is doing a nice solid job of turning its business around. Free cash flow has been steadily improving over the years, it slowly has been paying off debt, and THC stock has attracted interest across several respected mutual funds — including some of my favorites, such as T. Rowe Price Mid-Cap Value Fund, and Fidelity Leveraged Company Stock Fund.

THC shares trade at only $5.26, which is about a 14 P/E, equivalent to its long-term growth rate. I think this stock can double much faster than in the several years its growth rate might suggest, given how well its turnaround is faring. I think earnings estimates will improve dramatically and set the stage for a big jump in the stock price.

E-Trade

E-Trade (NASDAQ:ETFC) is a classic play in the “can’t shake the stink” category. The company was in real trouble when the financial crisis hit, as it was exposed to some really bad subprime holdings in its portfolio. E-Trade held $3 billion in derivatives tied to these mortgages, known as collateralized debt obligations and asset-backed securities.

E-Trade has roared back this year and just reported earnings that beat estimates by 33%. ETFC is trading at a 17 P/E at $11.41 (it actually was below $10 to start the week). There’s always been speculation that the company would be sold, and Citadel Advisors — a hedge fund and the company’s largest shareholder at 9.9% — wants management to do exactly that. The company’s brokerage business alone is a prime asset. I see a distinct possibility of a double here, not only because of the buyout, but because of the company’s consistently improving underlying financial position and increasing earnings.

Demand Media

I always bristle when I see Demand Media (NYSE:DMD) offering freelancers the chance to write evergreen content articles for their many websites, because the pay is absolutely atrocious. However, supply of freelance writers exceeds demand, and so Demand Media can demand a low rate of pay — and writers take it. That’s led to a very efficient cost structure for a company that has figured out how to generate traffic to its popular information-driven websites.

I was shocked to discover Demand Media is expected to go from break-even in 2010 to a 23-cent-per-share profit this year, and 38 cents next year. While there is no real barrier to entry in this arena, its websites slowly are becoming go-to names, and their SEO capabilities are driving that traffic nicely.

DMD has $103 million in cash and no debt. It is a speculative play, but at $6.38, there is not a lot of downside in the near term, and potentially a double going forward. The company was up 7.2% on Thursday, almost twice that of the overall market, which was in full bull mode.

Investors interested in finding other doubles under $12 need to keep an eye on fast-growing, smaller companies. The trick, however, is to be careful of stocks that haven’t been discovered at all. I happen to love DGSE Companies (NASDAQ:DGSE) and Cash Store Financial Services (NASDAQ:CSFS), both of which I believe are easy doubles, but the stocks are very illiquid, the spreads can be large, and it isn’t easy to open or close positions as a result. So be sure you know what you are getting into before you dive in.

As of this writing, Lawrence Meyers was long EFTC, DGSE and CSFS.


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