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[Pages:2]Fallen Angel Stocks Under $10

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One common myth about low-dollar stocks is that they're all small-cap names. Sure, a lot of our Stealth Stocks are smaller versions of blue-chip market leaders, but many companies trading under $10 are names worth hundreds of millions and even billions of dollars.

Many of the stocks in this latter group are known as "Fallen Angels." These are former household names and recent initial public offerings (IPOs) that have come upon harder times.

As the market has declined in the past six months, the universe of companies trading under $10 with a minimum market cap of $100 million and average trading volume of 100,000 shares has increased 53% to 703 names. Of these, the majority of the new stocks are these larger Fallen Angels.

Broken IPOs

Etsy (ETSY) is the poster child of companies that wowed private equity investors but stumbled out of the gate when they moved into the public realm in 2015. The online smallbusiness retail outpost went public in April 2015 at $16, but is currently trading at less than half that figure.

As with any Fallen Angel, value investors will likely step in at some point and try to call a bottom. That said, Etsy is supposed to remain unprofitable throughout 2016, which means that management will likely continue to burn through its IPO cash.

Note that Square (SQ), the most-anticipated IPO of 2015, missed being on this list by a couple of pennies after closing on its IPO day in November at $13.07.

Commodity Stocks

trading these names. With limited growth visibility, these two companies are expected to remain unprofitable in 2016 and we believe the majority of investors would be better served by focusing elsewhere.

Household Names

Hertz (HTZ), HP (HPQ), and Staples (SPLS) are three brands that most every consumer instantly recognizes. But would the same number of investors know that these are all stocks trading under $10? That's the case after these names fell 42%, 35%, and 47% in 2015, respectively.

Hertz is a market leader but has high fixed costs and the rental car industry is facing increased competition from ride-sharing firms such as Uber and Lyft. In the meantime, the company has a 710% net debt/equity ratio and its bonds are five levels below investment-grade status.

That said, we see more potential in HP, which recently fell into the single digits after separating into two companies, including Hewlett Packard Enterprises (HPE). HP retained the core printing assets, which is the slower-growing of the two businesses, but also pays investors a 5% dividend yield. We see potential value in the company, which is trading at 6x expected 2016 earnings of $1.62, which is enough to cover the dividend 3.3x.

Staples has also become an accidental higher-yielder, currently offering investors a 5.3% dividend. Like HP, the company generates enough earnings to cover its payout and its bonds hold an investment grade rating. Even so, Staples' near-term outlook weighs heavily on the proposed acquisition of Office Depot (ODP), which has received intense regulatory scrutiny.

Throughout 2015 and the early days of 2016, the energy and materials sectors significantly lagged the broader market, as underlying commodity prices fell across the globe. As a result, Freeport-McMoRan (FCX) and Marathon Oil (MRO) are relatively large companies that have dropped under $10.

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While this group will likely remain volatile in the new year, we believe that only the most nimble of traders should bother

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