by Jeff Reeves | April 20, 2012 5:00 am
I recently penned an article about high-priced stocks worth every penny, noting that the bottom line for investors doesn’t change regardless of what you pay on a per-share basis. Presuming everything else is equal, one share of a $1,000 stock has just as much profit potential or risk as 1,000 shares of a $1 stock.
That said, it’s impossible to ignore the psychological barriers to price. Why do you think companies regularly institute stock splits or reverse splits? On a basic level, those moves change nothing about the business — but they do affect perceptions.
If you just can’t bring yourself to buy a three-figure stock and want a “cheap” pick that will allow you to buy 100 shares, here are 7 stocks under $10 to consider.
I’ll keep my commentary brief to provide as many picks as possible, so please make sure you do some digging on your own beyond my brief analysis:
I have been beating the Alcoa (NYSE:AA) drum since December (disclosure, I personally own shares). And after its most recent earnings report and pop in shares, I remain convinced it’s still a great buy. Earnings are improving, thanks to a lean and mean restructuring, and the valuation remains cheap at a price-earnings ratio around 12. The pairing of strong baseline demand and the near impossibility of lower aluminum prices also limits your downside risk. (Get a full analysis of Alcoa here in my April 12 earnings recap).
Semiconductor stock LSI (NYSE:LSI). makes high-tech gear for networking and media services, among other applications. I highlighted this pick as a cheap stock to buy back in January, and it’s up 18% since then — double the Nasdaq. LSI is in the middle of a transformation away from data storage and into chipmaking. Back in 2010, approximately 37% of revenues came from storage and 63% from semiconductors — but in 2011 it divested its data storage operations to NetApp (NASDAQ:NTAP) so it can focus on the higher margins of being a chipmaker. The evolution is ongoing, but it appears to have been a shrewd move that has revitalized the stock and brought it back to 2007 levels.
There’s no shortage of commentary either way on the housing market, so I’ll leave it up to you to decide whether we’re at or near a bottom. But if you’re in the camp that believes there’s opportunity in housing and homebuilders — in the long term if not in the short term — then consider major player PulteGroup (NYSE:PHM) as a cheap stock for your portfolio. Yes, the company is still losing money. Yes, revenue is way down. But Pulte is sitting on $1 billion and cash and inventory worth $4.6 billion at the end of 2011. So it’s not going bankrupt any time soon. Of course, if you call a bottom and you’re wrong this cheap stock may get even cheaper…
SandRidge Energy (NYSE:SD) is an oil and natural gas exploration company that operates mainly in West Texas, Oklahoma and Kansas. Back in 2008, SandRidge was one of those commodity stocks that everybody wanted a piece of. It doubled from around $30 to over $60. . .and then crashed with oil prices to under $10. SandRidge might never get back to its previous share price. But the company is actually tracking a revenue number not seen since its 2008 peak. If you believe the upwards march of energy prices will continue, consider Sandridge a cheap alternative to Big Oil.
Sumitomo Mitsui Financial Group (NYSE:SMFG) provides various consumer, commercial, corporate banking and other financial services in Japan. Like domestic financials, SMFG has seen a very nice run year-to-date, tacking on 20% since Jan. 1. The difference is that Japanese stocks are much more conservative than their American peers, and thus not as exposed to leverage or lingering risks in the mortgage market. Sure, macroeconomic fears have hurt Sumitomo over the past few years — but revenue leaped from $33.5 billion in 2010 to $43.5 billion in 2011, and earnings soared 43%. Forecasts are robust for 2012, too. For more background, check out a Forbes column about the strength of Japan’s banking stocks – which also outlines the obvious risks these banks post, being closely tied to Japan’s rather ho-hum economy. That limits risk, but could limit upside too.
You may think if you’re shopping for cheap stocks, then that will exclude you from big dividend payers. Not so — Telecom Corp. of New Zealand (NYSE:NZT) is an overseas investment, but one that pays a juicy dividend. Last quarter it paid 42 cents per share against a share price of less than $10. Annualized, that’s a stunning yield of over 16%! However, the dividends are very volatile and unreliable. Last march, for instance, the payout was less than 13 cents a share. But if you’re looking for yield, this cheap pick is worth a gander.
I also talked up Wendy’s (NASDAQ:WEN) in January in great detail as part of a cheap stocks to buy feature, and few of my initial reasons have changed. The sale of lagging Arby’s Restaurant Group backed out some revenue, and restructuring costs have been a short-term drag. But the sale has allowed Wendy’s to focus on its healthy chain and not get bogged down in the struggling Arby’s brand. The leadership of Emil Brolick — who successfully rejuvenated fast-food giant Yum! Brands (NYSE:YUM) through international expansion is a huge plus, too. (My colleague Tom Taulli just weighed in on the pros of Wendy’s stock recently, too.)
Jeff Reeves is the editor of InvestorPlace.com, and author of “The Frugal Investor’s Guide to Buying Great Stocks.” Write him at email@example.com, follow him on Twitter via @JeffReevesIP. As of this writing, he owned a long position in Alcoa but none of the other aforementioned stocks.
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