These battered stocks are ripe for a rebound. By David Landis, Contributing Editor October 3, 2008 When we talk about a low-priced stock, we usually mean one whose share price looks cheap in relation to the company's profits or some other fundamental measure. But some stocks are also cheap in another sense: You can buy their shares for a few bucks -- in some cases, for less than you'd pay for a gallon of gas. A stock price in single digits isn't usually a sign of value. Stocks with microscopic prices oftenrepresent troubled companies that most investors have given up for dead. In other cases, the company is unproven and flying below everyone's radar. The trick is to look past the low price for the good stocks that have gone unnoticed. Low-priced stocks are usually risky. Companies in this price range are often unprofitable or debt-ridden, or their business strategies are untested. They're suitable only for the small portion of your portfolio set aside for high-risk investments. We've identified seven stocks that trade for roughly $7 or less that we think won't be so low-priced down the road. Fido's enablers The economy may have gone to the dogs, but the dogs aren't complaining. Nor are the cats. Spending on pets in the U.S. is expected to hit $43.4 billion this year, up more than 5% from last year, according to the American Pet Products Manufacturers Association. That's almost what we'll spend on toys and candy combined. Advertisement How to cash in on this trend? One solution is to buy shares of Animal Health International (symbol AHII). The company supplies more than 40,000 products -- including pet food, drugs and equipment -- to more than 65,000 veterinarians, retailers and farmers. However, shareholders of Animal Health, which went public in January 2007 at $11, haven't cashed in on the pet boom. The stock plunged from its July 2007 high of $15 to a bit less than $8 in early September, mainly because of problems in the livestock industry, which accounts for about 60% of Animal Health's sales. High grain prices have squeezed farmers' profit margins. They've responded by reducing herds and spending less on Animal Health's products. But prospects are bullish for a stronger beef market and for the stock. Beef-cattle raisers account for about a third of Animal Health's sales, says Piper Jaffray analyst Mark Arnold. Grain prices are stabilizing, and activity in the futures market foreshadows higher cattle prices in the next six to 12 months, he says. This should spur farmers to raise more cows and buy more Animal Health products. Meanwhile, the pet portion of Animal Health's business continues to track national trends. The Westlake, Tex., company posted a 14% increase in sales for the fiscal year that ended in June. Analysts see sales rising 6% in the June 2009 fiscal year. Advertisement Bullish on bears Those cuddly stuffed animals created in Build-A-Bear Workshop stores are the stuff of nightmares for many Build-A-Bear shareholders. As recently as June 2007, the retailer's stock traded above $30, coasting on charming earnings gains and the regular opening of sprightly new stores. The founder, Maxine Clark, even calls herself Chief Executive Bear. Too cute. But high costs and weak retail spending have beaten the stuffing out of the stock (BBW), which recently traded at less than $8. Earnings fell last year, and analysts see them falling by roughly half this year, to 57 cents a share. The concept is simple. Kids stuff, fluff, dress, accessorize and name their own teddy bears and other stuffed animals at 388 stores worldwide. To keep customers coming in, Build-A-Bear tries to tap in to current fads. For example, this fall it launched a Hannah Montana bear, which the company describes as "sparkly white with purple trim that combines the cool factor and the cuddle factor." Lawrence Creatura, manager of Touchstone Diversified Small Cap Value fund, understands why investors aren't cuddling up to the stock. In Build-A-Bear's second fiscal quarter, which ended June 28, U.S. same-store sales (sales at stores open at least 12 months) were down 21% from the same period in 2007, and the company lost $4.8 million, or 25 cents per share. "Investor sentiment is dark," says Creatura, whose fund owns the stock. Advertisement Creatura says the "build-a-bull" case goes like this: The company is debt-free, still profitable (especially overseas), and "the potential for expansion beyond Europe remains untapped." Can you say, Build-A-Panda? True, the St. Louis company's domestic operations look dicey while the U.S. economy struggles. But expect a leaner, meaner Build-A-Bear to emerge by the time the recovery comes and to capitalize on, as Creatura puts it, one immutable fact: "Teddy bears and birthday parties won't go out of style." Movie-store champ With DVDs by mail commonplace and video on demand gaining steam, renting a movie at a store seems almost quaint. No wonder shares of Blockbuster (BBI have lost more than 90% of their value since 2002; at a bit more than $2, they trade for less than what you'd pay to rent a third-rate kung fu flick. Even so, the in-store movie-rental industry isn't dead. At $5.8 billion a year, it still dwarfs movies by mail ($2 billion) and video on demand via cable and Internet ($1.3 billion). Blockbuster, based in Dallas, dominates its niche with more than 4,800 U.S. stores (and nearly 3,000 foreign outlets). Its market share, about 33%, has actually risen since number-two Movie Gallery closed 1,000 stores while in bankruptcy reorganization (it now has 3,300 stores and a 15% market share). Advertisement True, the business of delivering movies by mail and video on demand is growing, and the in-store rental business is shrinking. But Blockbuster is number two in movies by mail, with 3.2 million subscribers (though that's well behind Netflix's 8.2 million subscribers). And a year ago, Blockbuster bought MovieLink from a consortium of Hollywood studios to become a player in digital movie downloads. Blockbuster's focus lately has been its long-neglected retail business. New chief executive Jim Keyes, who helped turn around the 7-Eleven convenience-store chain, has boosted results by stocking more new releases and experimenting with different pricing schemes and store formats. He has also made a major push to grab a bigger share of the $16-billion market for buying DVDs and the $11-billion market for video games. The results have been impressive. Earnings have improved for four straight quarters. Same-store sales have risen for two consecutive quarters. The company forecasts operating profits of as much as $315 million this year, more than double last year's $143 million. Analysts expect per-share profits of 17 cents this year and 33 cents next year, compared with a loss of 87 cents in 2007. The stock doesn't seem to reflect much of this good news, though. It's trading at less than half its 52-week high. One reason may be fallout from an aborted attempt to expand its video-game business by buying troubled retailer Circuit City for $6 a share in cash. Blockbuster shares were trading for more than $3 when the deal was announced in April (it was abandoned in July). If the shares merely return to where they were before the Circuit City deal was announced, they'll be up more than 30%. Cash for gamblers People tend to leave casinos without much money in their pockets -- no surprise there. But what you may not know is that they often enter them in the same condition. From 50% to 90% of a casino's take comes from cash obtained on the premises. "The lifeblood of a casino is cash, and it does not walk in the door," says Scott Betts, CEO of Global Cash Access Holdings (GCA. The ten-year-old company has built a business with $600 million in annual revenues by providing gamblers with on-the-spot access to their money via ATMs, credit-card cash advances, debit-card transactions, money transfers, check verification and other serv-ices. Last year, the Las Vegas company processed more than 90 million transactions and dispensed more than $21 billion in cash. GCA's products range far beyond ordinary ATM machines. For example, the Casino Cash Plus 3-in-1 ATM offers a casino patron the option of turning an unsuccessful ATM withdrawal into a debit-card or credit-card cash-advance transaction. GCA is working with a number of gaming-device manufacturers to embed "cashless" electronic-payment systems in computer server-based interactive games. It also operates the industry's leading credit bureau, which stores customers' credit histories from hundreds of gambling establishments. Subscribers can use the data to decide whether to extend credit to a customer or to develop marketing programs to increase customer loyalty. GCA gets most of its revenues from transaction-processing fees. The credit bureau and check verification are subscription services. Gaming stocks have taken a big hit as the economy has turned down, and GCA is no exception. Its shares are down 65% since July 2007. But while the industry has suffered, GCA has not been sitting still. It bought two of its largest competitors, Certegy Gaming Services and Cash Systems, in the past year and now has contracts with about 1,200 U.S. gaming establishments, about 80% of the total, Betts estimates. The acquisitions will add about $100 million to revenues, Betts says. At a little less than $6, GCA trades for just nine times estimated 2008 profits. The stock looks cheap given the company's healthy cash flow, long-term contracts and strong position in an industry that will inevitably rebound. Cheap liquid assets High gasoline prices and a bad economy are a sour mix for companies that make their money from vacationers. But it has been a pretty good year, so far, for Great Wolf Resorts (WOLF, a chain of 11 indoor water parks. The company recently posted its ninth-straight quarter of growth in revenue per available room, a key measure, and boosted its overall revenue projection for the remainder of the year. The high cost of vacationing may be working in Great Wolf's favor as travelers downsize their ambitions and spend more time at the company's regional resorts. "A lot of people have been turning weekend getaways into family vacations," says chief operating officer Kimberly Schaefer. The average stay, formerly two days, has ticked up by a quarter of a day this year, and on-site spending has increased as well, she says. Great Wolf's resorts combine elaborate indoor water parks of up to 82,000 square feet with roomy guest suites, themed restaurants, spas and family-oriented activities. Guests spend an average of $249 a night on a room and another $125 daily on food and other activities. The stock has fallen from $15 last summer to $6 because of concerns about the economy and the company's high debt load. Great Wolf's debt is more than five times its operating profits, a high amount of leverage. However, virtually all of its permanent financing is in place for projects that are completed or in progress, and about two-thirds of it is at a fixed rate. As recently opened resorts in Grapevine, Tex., and Grand Mound, Wash., ramp up and a new Concord, N.C., resort opens next year, the company should generate enough cash to begin paring down that debt, Schaefer says. The Madison, Wis., company plans to minimize its capital outlay for future resorts by taking on partners or by licensing its brand to third parties. Great Wolf, which went public in December 2004 at $17 a share, is not yet profitable. But its collection of properties has lived up to early expectations, and it would be hard for others to duplicate. A 400-room Great Wolf resort costs about $120 million to build. Meanwhile, the shares trade for less than the company's tangible book value, which is the value of its physical assets minus liabilities. Reinvented consultant The Hackett Group (HCKT is a consulting firm that helps big global companies operate more efficiently and, if necessary, transform their businesses. The company itself underwent a successful transformation; formerly known as Answerthink, it was, until five years ago, primarily an information-technology consultant, helping firms install complex software systems. Today, most of its revenues come from an entirely different business: a proprietary database of 4,000 benchmarking studies that it has conducted for more than 2,700 clients. Hackett uses those benchmarks to analyze, say, a client's cash flow or working-capital performance and suggest how to improve it. Miami-based Hackett counts many of the world's largest companies, including 29 of the 30 members of the Dow Jones industrials, among its clients. The benchmarking business and a subscription executive-advisory program now account for 70% of Hackett's revenues, compared with just 15% five years ago. CEO Ted Fernandez expects those businesses to grow by more than 15% this year. The IT business has been in decline, although it appears to have stabilized recently. The low share price notwithstanding, Hackett boasts a profitable business with good margins and a lot of growth opportunities, particularly overseas. In the second quarter, foreign revenues rose 40% from the same period a year earlier. Despite the weak domestic economy, U.S. revenues climbed 13% as clients paid for serv-ices that could quickly boost their own profitability. Plus, Hackett has a solid balance sheet. Given Hackett's profitability and stability, the share price is low but not all that cheap. At $6, the shares trade for 19 times expected 2008 earnings. However, the company has consistently reported better-than-expected quarterly earnings, and the two analysts who cover the firm expect 25%-plus annual earnings growth on average over the next five years. Chip-making rebound You know that annoying lag before your cell phone boots up? What you need is quicker flash memory. Not to get too technical, but if your phone had a NOR memory chip, you'd be texting in a flash. A Sunnyvale, Cal., company called Spansion (SPSN is the biggest maker of NOR chips, which also find their way into cars, video games and telecom gear. But the chip business is notorious for boom-and-bust cycles. And right now, much of the industry is "viewed as a wasteland" because of overcapacity, says Scott Barbee, manager of Aegis Value fund. Spansion has suffered along with all the chip players -- worse than most, in fact. Analysts expect it to lose $2.40 a share this year. The stock, meanwhile, hovers at about $2, down from $18 in September 2006. The hope for Spansion lies in a NOR plant that is just coming online in Japan, says Barbee. The chips from this new plant will have much more memory, and they'll be cut from bigger wafers. That, Barbee says, should lead to "tremendous" savings. Meanwhile, NOR chips can be used for things other than devices such as cell phones. Server farms -- collections of computer servers that store massive amounts of data -- can use NOR chips to cut energy costs. So Spansion could cash in on these two facts: Energy costs are rising and server farms depend on efficient performance per watt. Still, this stock isn't for the faint of heart. The key question is whether Spansion can sell those better, cheaper chips at a good profit in a market awash in chips and suffering from low prices. The betting here is that it can.