Buy these stocks for under $5 for a solid return and learn how to find cheap stocks
I’ve got a love-hate relationship when it comes to stocks with low share prices. It can be a great way to uncover some hidden small-cap companies ready to rocket higher but the fact that a stock price is under $5 doesn’t really mean much.
Stocks under $5 can actually be a good investing strategy if you look for smaller companies with catalysts for growth, not just because the stock price is cheap.
I’m going to reveal my favorite stocks for under $5 and then show you a video explaining why stock price shouldn’t be the biggest factor in stock-picking. I’ll also reveal the three things I look for to find cheap stocks that are also great investments.
My Favorite Stocks for Under $5 Dollars
After nearly a decade of rising stock prices, it’s getting increasingly difficult to find stocks under $5 and even more difficult finding cheap stocks with solid investment value. I used factors learned over years as an equity analyst and in venture capital to pick three low-price stocks with big potential.
Valhi Inc (VHI) is a $800 million conglomerate of chemicals, component products and real estate management trading for $2.37 per share. Shares have struggled lately even as the company builds up a $400 million cash hoard for financial flexibility and free cash flow has jumped.
Honestly, I see no reason why the company should be in such disparate businesses. That leads me to believe it could become a target for a breakup or segmentation which could unlock some of the hidden value. Financials are solid and the shares pay a 3.2% dividend to keep investors happy until the price moves higher.
Entravision Communications (EVC) is a $440 million Spanish-language media company with 51 television stations and 48 radio stations across the Southwest United States. Shares trade just under $5 and have a lot of potential for growth.
The company is the largest affiliate for Univision and UniMas, cementing its position in an otherwise fragmented market. Earnings jumped in the last year and the company is primed to benefit from a growing Latino population. As consolidation increases in the media space, this one could become a takeover target.
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Eldorado Gold (EGO) is a $700 million gold miner with shares trading around $0.90 each. The company specializes in gold production in emerging markets including Greece and Turkey. This was once a huge cost advantage for the firm but has since hit the company on problems with local governments, especially in Greece.
The Greek government denied or slow-walked permits for two major projects and has caused the company to downgrade production targets significantly. The company won permits for one project late last year by threatening to cut employment in the country. Eldorado won an arbitration earlier this year for the permits on the second project but the government has yet to comply.
Eldorado recently threatened the Greek government with a financial action to recoup costs to the non-compliance. It likely won’t recoup much but it should quicken the process for permitting. Eldorado still has solid production to keep the company going and the renewal of Greek production will clear a major overhang in investor sentiment.
Why Cheap doesn’t matter in stock prices
Before we get to those three factors I use to pick low-price stocks for investment, we need to talk about why buying stocks under a certain price really doesn’t matter.
Stock price has nothing to do with value. It’s simply the size of the company divided by the number of shares it’s issued to investors. A $5 billion company with one million shares issued would have a stock price of $5,000 each. That very same company would have a stock price of $30 if it had 167 million shares issued.
This video will help explain it, as well as give you two more low-price stock picks.
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How to Find Cheap Stocks that are also Valuable Investments
Instead of starting by looking specifically for stocks under 5 dollars, you might start by looking at small-cap companies. Those are companies valued at $3 billion or less, or even micro-cap companies which are usually valued at less than $1 billion.
These smaller companies have greater flexibility compared to larger peers and can focus on a specific region rather than building sales across the globe. Smaller companies often become acquisition targets for large companies looking for growth.
Once you’ve filtered for smaller companies, I like to look for three factors to find investments of any size.
- Look at bigger economic picture and invest in sectors that do well during that stage in the economic cycle. Sectors perform differently depending on the economy. This can be a huge tailwind for a company, having the economy boosting earnings, and means you’ll book solid returns on any company within the sector.
- Make sure revenue, earnings and cash flow are trending higher. I focus on the Statement of Cash Flows because it’s less easily manipulated by management compared to earnings. Pick stocks of companies with solid fundamentals and they’ll grow the stock price over time.
- Finally, I look for companies with strong catalysts for growth. Just having the economy behind them and good financials will help produce returns. Having a reason the stock price could shoot higher is a recipe for huge returns.
There’s nothing wrong with investing in low-price stocks, just make sure there are other reasons to buy the stock beyond a cheap share price. Whether you’re looking for the best stocks under 5 dollars or a different price point, you’ll always find a good investment if you focus on these three factors.