Finding the best stocks with a low price means looking beyond just share price.
One of the most common questions I get from investors has absolutely nothing to do with a good investment. They confuse the value of a stock with the price of the shares in looking for stocks with a low price.
But there is a little bit of truth in the myth.
By the end of this video, you’ll know why low price doesn’t equal a good stock pick and three strategies you can use to find great investments.
Is Low Price Stocks Just an Investing Myth?
One of my favorite subjects is talking about investing myths you hear on the internet. From the ridiculous to just plain bad advice, it’s no wonder the average investor earns less than 4% a year according to researcher DALBAR.
That’s why I decided to put this video together in partnership with The Motley Fool to bust one of the biggest investing myths I see.
One of the most common questions I get from investors is, What are the best stocks with low share prices? The question makes me die just a little inside, but I understand the thinking.
Let’s look first at why share price means absolutely nothing, then I’ll reveal two solid stock-picking strategies. I’ll also share two stock picks under $50 that aren’t just priced cheap but are great investments.
Now a tale of two stocks.
You could pick up shares of this mystery retailer for just $8 a share, own a piece of an international company for less than the price of a venti-venti mochachino.
By comparison, it would cost you over $1,800 per share for our other mystery retailer. So it’s either one single share or about 400 beanie babies.
The first stock was Build-A-Bear Workshop, down 20% in the last year, underperforming the S&P 500 by more than 30%. While our second mystery stock is Amazon with an astounding 75% return over the twelve months, blowing the doors off the broader market.
What Determines Stock Price?
The price of a company’s shares depends on just two things, neither of which have anything to do with value. First is the market value of the company, its market capitalization. The second is the number of shares a company has issued.
There’s no difference for a company in having a million shares on the market or ten million shares. Netflix is a $172 billion company with about 434 million shares issued for a $400 per share price. If Netflix were like Microsoft with its 7.7 billion shares issued, the shares would be priced at about $22.40 each but it would still be exactly the same company.
Two Stock Picking Strategies that Actually Do Matter
So if stock price has nothing to do with a good investment, what are some strategies you can use to find great stocks. I’ll cover my two favorite stock-picking strategies first and then share two stocks I’m looking at for my own portfolio.
First let’s look at growth investing which is finding companies with the potential to grow earnings faster, usually based on a competitive advantage and industry growth. This is actually the subject of an entire video I did last week where I shared a stock screen and four characteristics I use to find solid growth stocks.
The easiest way to start your growth investing strategy is to look for companies that have outperformed in the past with strong earnings and sales growth. Then you can look through the list to find companies with a competitive advantage that will continue this outperformance.
Whenever I’m looking to add stocks to my growth portfolio, I’ll start with the stock screener on The Motley Fool. I’ll toggle high and positive conviction here which narrows the list to stocks with a high degree of confidence in the upside.
I’ll usually check for small- and mid-cap under asset class to narrow the list to companies under about $10 billion in size. That’s not a hard-fast rule but it gets harder for companies to keep up the higher growth rates when they get into the hundreds of billions in size.
Finally, I’ll toggle on this 25% and 50% and above for revenue growth. That’s going to start me with a short list of stocks here, potential growth investments that I can research further.
With this short list, I’m looking for companies with farther to run on industry growth and advantages over competitors.
Our next strategy is what most investors think of as the opposite of growth investing but you’re still looking for a lot of the same characteristics. Value investing is finding stocks that trade below their true worth based on fundamentals or compared to peers.
When looking for value stocks, most investors start with basic measures like the price-to-earnings ratio or price-to-sales. By comparing this to the ratio for competitors, you get a sense for which stocks are relatively cheaper.
Now of course, cheap doesn’t equal good so you have to look further into the stocks to see if the shares should be priced higher or if there’s a reason they’re cheaper. A lot of times good companies will get hit with bad news that might temporarily send share prices lower so using this value investing strategy, you can get in on the deal before the stock price rebounds.
Just as with growth stocks, I’m fundamentally looking for strong companies with good management that have some kind of an advantage over peers that is worth more than is priced into the stock.
Why the Low Price Stock Investing Myth Persists
Those are two core investing strategies but I do understand one reason why the low share price myth persists. With most online investing platforms, you can only buy whole shares. That means you’ll need at least $1,800 in your account to buy that one share of Amazon, might be possible but even a $10,000 portfolio would mean 20% of it is in one stock.
On the other hand, you could pick up a few hundred shares of build-a-bear and only have a small part of your wealth in the stock.
So to help in finding good investments that also happen to be lower priced, The Motley Fool has released a special report and it’s five favorite stocks for under $50 per share. I looked through the report to pick out my two favorite using the investing strategies above.
Kinder Morgan is one of my favorite high-yield stocks in the energy space. The company owns pipelines and storage facilities for oil and gas, connecting oil fields to refiners and charging a fee on the transportation.
This means revenue isn’t directly tied to the price of oil or gas because the company sets long-term contracts for the amount that goes through the pipeline. The company also owns some oil production so it’s a little more vertically-integrated compared to other midstream pipeline companies.
Like a lot of companies in energy, the company had a rough 2015 after the drop in oil prices. While sales don’t move one-for-one with energy prices, it still hurts when the price of oil falls from $100 to $20 a barrel in less than a year. Kinder slashed it’s dividend to protect cash flow, shifted to internal funding and focused on efficiency.
The great news for new investors is that the share price has stabilized, pay a 4.4% dividend yield and management believes it can return to dividend increases this year.
Rollins is a best of breed pest control company with business on every continent except Antarctica. What I love about Rollins is its predictability, the company gets about equal sales from residential and commercial customers which gives it business-cycle safety. More than 80% of its business is recurring from customers.
Rollins has reported 18 years of uninterrupted earnings growth and 12% annual dividend increases for 16 years. The company has $107 million in balance sheet cash and no long-term debt, giving it a lot of financial flexibility.
There are a lot of investing myths like stocks with a low price. Seeing through these myths and understanding the strategies to find great investments will put you on track to beat your goals. Check out that stock screener on The Motley Fool to get you started.