June 13 (Bloomberg) -- The average U.S. stock sells for about $26 a share.

For some investors, that's too much. They prefer stocks selling for $5 to $10.

Intuitively, these investors believe that a $5 to $10 stock has ``more room to grow.''

You can call this irrational if you want. There's little difference between owning 10 shares of a $40 stock and 100 shares of a $4 stock.

Yet there is some method to the madness of people who prefer cheap stocks in the sense of raw price. It comes down to the difference between institutional investors and individuals.

Institutions such as mutual funds, insurance companies and pension funds typically pay commissions of 1 cent to 6 cents a share. And they deal in thousands, or tens of thousands, of shares at a time.

For them, $5 to $10 stocks run up a higher commission tab because they need to purchase more shares to equal, say, 2 percent of their portfolio.

Small investors, by contrast, often pay a flat fee to trade. To them, there is no harm to them in buying low-priced shares.

Some institutional buyers also regard lower-priced stocks as less respectable than higher-priced ones. So $5 to $10 may be only scantily covered by Wall Street analysts.

That's why individuals can sometimes find undiscovered bargains among the cheapies.

Performance Record

Each year beginning in 2001, I have compiled a list of stocks I like in the $5 to $10 range.

Last year's list returned 10 percent (including dividends) from June 16, 2005, through June 9, 2006. For comparison, the Standard & Poor's 500 Index was up 5.4 percent.

Ariba Inc. (ARBA) and Harvest Natural Resources (HNR) were the leaders, each up more than 30 percent. EarthLink Inc. (ELNK) and Stewart Enterprises Inc. (STEI) were losers, down 14 percent and 5.6 percent, respectively.

My average 12-month return on these lists for the past five years has been 5.5 percent, compared to a 2.3 percent average return on the Standard & Poor's 500 Index.

If you held the stocks for three years, the average performance (on the 2001 through 2003 lists) has been 38 percent, compared to 20 percent for the S&P 500.

Here are my new picks in the $5 to $10 range.

First, I recommend Journal Register Co. (JRC) of Trenton, New Jersey. It owns the New Haven Register, 26 other daily newspapers, and 362 other publications.

Journal Register, which closed yesterday at $9.82, has been profitable for at least 11 years in a row. Last year, even with profits down from 2004 levels, it earned a 22 percent return on equity.

Grey Wolf

The problem is debt, which has mounted up to 346 percent of equity. Normally I don't like debt-heavy companies. I think the Journal Register is better suited to handle it than most, thanks to predictable cash flow. The stock sells for nine times earnings.

Next, I like Grey Wolf Inc. (GW), a natural-gas contract driller based in Houston. It deploys a fleet of 114 drilling rigs, mainly in Texas and the Gulf Coast.

Although natural gas is not currently in shortage, I believe there will be periodic shortages in the U.S. during the next five years.

In 2002 and 2003, Grey Wolf had net losses. In 2004 it earned an $8 million profit, and last year it earned $121 million on sales of $697 million. The stock, which closed yesterday at $7.03, sells for 11 times earnings.

Earthlink Again

Third, I will bring back EarthLink for another try. Based in Atlanta, EarthLink is the fourth-largest U.S. Internet service provider by number of subscribers, according to a May 4 tally by ISP-Planet, an information service about Internet service providers run by Internet.com in Westport, Connecticut.

EarthLink reported 10 consecutive years of losses from 1994 through 2003. In 2004 it earned $111 million and last year almost $143 million.

In 2005 EarthLink improved its profitability, yet the stock sank 3.6 percent -- it closed yesterday at $8.03 -- and still is far below its record high of $66.50 in 1999 during the Internet stock boom. I consider it a good value at nine times earnings and 0.85 times revenue.

Fourth, take a look at Premiere Global Service Inc. (PGI) of Atlanta. The company provides business services such as conference calling, electronic document storage and mass marketing by phone or e-mail.

Premiere

Premiere's stock trades for about $8 a share lately, a far cry from the price of more than $47 it commanded in mid-1996. Yet profits now are above what they were then.

I think Premiere represents a decent value at 13 times earnings, 1.8 times book value (assets minus liabilities) and 1.1 times revenue.

Fifth, as a speculation I recommend Sea Containers Ltd. (SCR/A) of Hamilton, Bermuda. The company, whose shares trade on the New York Stock Exchange, leases cargo containers and operates trains and ferries.

Its main train line is the Great North Eastern Railway, which runs between England and Scotland. Most of the container- leasing business is done through GE SeaCo, a joint venture with General Electric Co.

Bankruptcy talk has dogged Sea Containers lately. Its debt amounts to 188 percent of stockholders' equity.

Sea Containers stock sells for less than $7 a share, down from more than $44 in June 1998. It fetches only 0.24 times book value and 0.10 times revenue. There is no price-earnings ratio because the company posted losses in its three most recently reported quarters. The annual report for 2005 has been delayed.

The company agreed yesterday to sell its Finnish ferry operations and plans to use $510 million from the sale to repay debt. The stock closed yesterday at $6.40.

(John Dorfman, president of Thunderstorm Capital in Boston, is a Bloomberg News columnist. The opinions expressed are his own. His firm or its clients may own or trade investments discussed in this column.)

To contact the writer of this column: John Dorfman in Boston jdorfman@bloomberg.net.

Last Updated: June 13, 2006 00:10 EDT