5 hot stocks at Big Mac prices

If holiday shopping has blown your budget, here's some relief: Wall Street is offering bargains.

The stocks of many small yet promising companies have been hammered as nervous investors have shifted funds to the perceived safety of big businesses with proven track records.

Here's the upshot: There's a fresh crop of stocks under $5 a share that could double in a year as investors come to their senses and realize the subprime-mortgage debacle won't bring economic Armageddon.

My five favorite stocks selling for less than the price of a Big Mac meal are stem-cell-research company Neuralstem (CUR, news, msgs), flat-panel-TV designer Syntax-Brillian (BRLC, news, msgs) and energy companies Teton Energy (TEC, news, msgs), International Royalty (ROY, news, msgs) and Abraxas Petroleum (ABP, news, msgs).

These stocks may see a bounce soon because of the January effect -- a rebound once the pressure of year-end tax-loss selling abates. But the bigger gains will come after some key changes in investor psychology play out.

"This is a flight-to-quality market, so anything perceived as risky has had a really hard time making headway," observes Eric Barden, a co-portfolio manager of the Texas Capital Value and Growth Fund. "But when this turns, it is going to turn really fast."

When is the turnaround coming?

Barden thinks it could be six months before investors develop an appetite for riskier small-cap stocks.

But I think he may be in for a surprise, and our under-$5 stocks could bounce back sooner than that. Here are four reasons why, thanks to James Paulsen, an economist and market strategist with Wells Capital Management:

• We've been waiting at least six months for the subprime disaster and housing weakness to bring down the economy. So far, they haven't. Employment and wage growth are hanging in there. Consumer spending was solid in November. Foreign demand for the goods we make is healthy. At some point, investors will realize the much-feared economic disaster ain't gonna happen -- and they'll develop a taste for riskier areas of the markets again, such as stocks selling for less than $5. The underlying conditions are still in place for decent economic growth: falling interest rates, government deficit spending, a weaker dollar and a continued expansion in the money supply.

• Fears about shortages of liquidity -- the availability of money -- are overblown. Just look at the record levels of personal net worth in this country, the solid corporate balance sheets, currency reserves held by central banks and the amount of investment cash in the sovereign funds of foreign governments. "It's a preponderance of fear that is keeping liquidity in the closet, not a shortage of liquidity," Paulsen says. "If someone says things are OK, then watch the liquidity come out." Wait for signs that subprime-related write-offs are easing or for signs of continued economic strength to calm jitters. Again, a change in psychology will benefit the least liquid stocks the most, including our under-$5 stocks.

• The weaker dollar helps small-cap stocks as much as big companies, if not more, because the cheap dollar attracts foreign buyers to our shores. Large-cap companies already have an overseas presence.

• Historically, small-cap stocks do well when there is inflation, which is making a comeback.

So now, here's a closer look at five stocks trading for less than $5 that should benefit from these trends, as well as company-specific developments. To find these stocks, I looked for companies where insiders are buying the most, and I consulted with investors with good records who specialize in this part of the market.

Hope for paraplegics?

Researchers working with the tiny biotech company Neuralstem have discovered that if you implant the right human stem cells into the spines of paralyzed rats, the cells take over and regenerate in a way that allow the rats to walk again. This stunning breakthrough shows the promise of a controversial area of medicine known as stem-cell research.

But would this work in humans? The world is about to find out. By March, Neuralstem may begin testing the same science on humans in a study at the University of Pennsylvania. As early as three to six months later, it could start to see results. If this process, known as regenerative medicine, or cell therapy, shows promise in the study, I'd expect nice gains in this under-followed stock, which recently traded for $2.85 a share.

The Pennsylvania study will test the use of stem cells to treat a kind of paralysis called ischemic paraplegia. This occurs when people have a hemorrhage in the spine, typically because doctors had to clamp the aorta, the main artery from the heart, when treating another problem. Strictly speaking, this is just a "feasibility and safety" study.

"But these will be real patients getting the real thing from the beginning, so we expect to see if we have impact," says Neuralstem Chief Executive Richard Garr.

Later next year, Neuralstem will likely begin testing cell therapy on patients with Lou Gehrig's disease or traumatic spinal cord injuries. The technique might also be used to treat other central-nervous-system disorders, such as Parkinson's and Alzheimer's diseases, and even depression.

Neuralstem is a player in this space because it owns technology that allows doctors to reproduce huge amounts of stem cells and to shut off the reproduction process when enough have been made.

Flat-panel play

If you've been shopping for a flat-panel TV this holiday season, chances are your eyes have gazed on the Olevia brand of Syntax-Brillian, a tiny company based in Arizona that outsources manufacturing to Asia.

In the past four months the company has offered shareholders as much unwelcome drama as the flesh-eating zombies tormenting Will Smith in a futuristic Manhattan in the movie "I Am Legend."

Syntax-Brillian stock has tumbled 60% since early September to recently trade at $2.45 a share. But insiders clearly think investors are overreacting to a couple of pieces of bad news. In the past month, they've snapped up $2.2 million worth of stock.

Syntax-Brillian designs and sells high-definition televisions that use liquid-crystal-display (LCD) technology. It also owns camera maker Vivitar, which it bought in November 2006.

In September, Syntax-Brillian stock got hammered when it said the credit crunch was squeezing Asian suppliers and hurting production. Then it announced a move to a royalty model for sales in China, meaning it would take a small cut of sales by licensing its brand instead of managing production itself. There was also a management shakeup that saw the finance chief exit -- rarely a reassuring event.

Investors are understandably unhappy with all of this, but consumers love Syntax-Brillian's flat-panel TVs, and that's what counts for me. Sales were up 54% in the third quarter. The company is in the sweet spot, selling midrange LCD TVs going for $1,000 or more.

"That is where the demand is right now, and these guys are really well-positioned there," says Mark Mowrey, a tech stock analyst who writes the TechValue Report. He thinks the stock will eventually trade up to $7 a share.

3 natural-resource plays

I believe energy and natural resources will continue to be hot sectors, so I'm including three plays from these areas in my under-$5 picks. The first is Teton Energy, a really small (market cap: $74 million) producer of natural gas in the Rockies. Because pipeline constraints make it hard to transport natural gas out of the Rockies, natural gas is cheaper there. This has hurt producers in the Rockies, but that may begin to change starting next year, Teton chief Karl Arleth explains.

The reason: Kinder Morgan Energy Partners (KMP, news, msgs) and ConocoPhillips (COP, news, msgs) are putting in a pipeline that should increase "export" capacity out of the region by 29% over the next two years.

Meanwhile, Teton should double production capacity next year, and it has enough financial strength to do that without issuing new stock, Arleth says. All of this may explain why insiders have purchased $691,000 worth of stock in the past month, according to InsiderScore.com.

International Royalty generates income by purchasing the rights to future royalty payments from mines producing metals such as copper, nickel and gold. It buys the royalty streams from mining companies that need to generate cash or from owners of mineral rights looking to cash out.

"The company is mainly tied to copper and nickel prices, which have gotten hammered in past three months," says Joe Dancy of LSGI Advisors, an investment company. So International Royalty shares have suffered, trading below $5 recently from above $7 in October.

But Dancy thinks copper and nickel prices will improve because of continuing strong demand from China, India and other emerging economies. He agrees that gold prices should go up because of a weakening dollar. So he thinks International Royalty is a buy below $5.

He's worth listening to because his LSGI Advisors has produced annualized returns of 23.7% a year over the past eight years by investing in small-cap stocks.

In early November, Abraxas Petroleum announced production and sales declines for the third quarter, and its stock has fallen 26% to $3.40. But the company says it can get back into growth mode through exploration and more-efficient production at its properties in Texas and Wyoming. It's also buying properties through a subsidiary called Abraxas Energy Partners, which the company hopes to spin out at some point. Insiders are putting their own money behind the plan. They've purchased $1.5 million worth of stock in the past six months, at prices below $4, a convincing vote of confidence.

Some words of caution

As microcap companies with narrow business plans, these five plays under $5 carry greater-than-average risk that something big could go wrong and derail the stocks. The stocks also have limited liquidity, or average daily volume, which means volatility; bad news could have a big downside.

The limited liquidity can also hurt you in another way: If any of these stocks are up more than 10% because of buying interest generated by this column, I strongly advise you to wait a few days and buy when the interest cools off, so you don't end up paying too much.

I like the prospects for all of these, and I believe overly negative sentiment toward small-cap stocks will reverse, so I'm putting all five of these in my model stock portfolio in MSN Money's Expert Picks section.

At the time of publication, Michael Brush owned shares of Neuralstem.