My Favorite Stealth, Inflection Point, and Game Breaker Stocks of All-Time

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We’ve been running the Stocks Under $10 newsletter and model portfolio since 2004. Readers often ask what are the best low-dollar stocks we’ve seen over the past decade?Let’s start with the Game Breaker category. Salesforce.com (CRM) quickly jumps to mind. Today, the company is a mega-cap technology firm, worth more than $45 billion in market value.

But back in June 2004, Cloud Computing was merely a novel idea—not the burgeoning industry it is today. That month, Salesforce.com raised $126 million in an IPO, at $11 a share. By August of that year, the stock fell as low as $9, creating the buying opportunity of a lifetime in the future Game Breaker stock.

Fast-forward 11 years and the company’s shares are trading north of $280 on split-adjusted basis. Cloud Computing has become a household name and investors would have made more than 3,000% on the investment. As testament to how much Salesforce.com has changed the game in the recent decade, we recently more than tripled our money in a Stealth Stock that appears to be a miniature version of the Cloud Computing leader.

Callidus Software (CALD) produces software that helps customers optimize their sales forces. In addition, a lot of Callidus’ products are offered as software-as-a-service (SaaS)—more commonly referenced to as Cloud Computing.

On the surface, this company’s description sounds a lot like Salesforce.com (CRM)—which is one of the most successful

growth stories in the past decade. But why buy a smaller name like Callidus, instead of a more established stock like Salesforce.com?

Namely, because Stealth Stocks trade a discount, since they’re flying below most investors’ radar screens. According to Bloomberg, some 47 analysts cover Salesforce.com, compared to just eight brokerages that follow Callidus.

As Callidus proves that it can continue to grow, it should generate more attention to the stock in the coming quarters. But in the meantime, what was the best Stealth Stock over the past decade?

For that, we’ll turn next to Sourcefire (FIRE). Long before Cloud Computing became a household name, IT directors and investors alike recognized the need for network security. The company had an IPO in March 2007 at $15, raising $100 million, promising to sell its own enterprise solutions in this area.

Sourcefire operated in a business with larger players like Symantec (SYMC) and many other that have since been acquired by even larger technology giants. Unfortunately for the company, it continued to grow, but was hampered by the fact it went public just before the pre-financial crisis highs.

As a result, the stock’s valuation took a massive haircut. Sourcefire fell under $10 by August of that year and even dropped under $4 by November 2004. Fast forward to July 2013 and Cisco Systems agreed to buy Sourcefire for $76 a share of cash. Being conservative, if investors had bought shares at the end of 2007 at $8.34, the Stealth Stock would have returned more than 900%.

Finally, we will go back to the annals of the model portfolio for our best example of an Inflection Point name, Standard Motor Products (SMP:NYSE). As the name suggests, the company makes after-market auto parts.

Before we bought the stock in 2010, Standard Motor had missed profit expectations two straight quarters. That said, behind the headline numbers, we noticed that company had been slashing costs-- including moving the majority of its manufacturing overseas.

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My Favorite Stealth, Inflection Point, and Game Breaker Stocks of All-Time

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Standard Motor was also leveraged to an emerging consumer trend—people were holding onto their cars longer. With the housing market struggling and unemployment rising at the end of the last decade, consumers were extending the life of their cars and replacing broken parts, rather than trading up for a new set of wheels every two or three years.

The combination of these factors- both the change in strategy by the company and an improvement in the macroeconomic environment-led to a sharp recovery in Standard Motor’s business in subsequent quarters.

The stock soon followed suit and we booked gains as high as 141% in the holding. Management further confirmed the company’s turnaround with a 40% dividend boost in early 2011.

There is no one model for finding a successful investment, especially in the volatile universe of low-dollar stocks. Even so, using these three strategies: Game Breakers, Stealth Stocks and Inflection Points, the Stocks Under $10 newsletter can help investors uncover more potential winners.

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