by Jeff Reeves | July 18, 2012 6:00 am
I recently maligned the idea of investing in penny stocks and micro-caps as a high risk gamble that no investor should be taking. Many people spouted off on the matter, as I expected with this hot-button topic. But what I neglected to anticipate was the natural question from the cheap stock investing crowd.
Namely, “If microcaps and penny stocks are out… what are some of the legitimate stocks trading for cheap per-share prices that you can recommend?”
For starters, let me state unequivocally that share price does not matter. In fact, I just wrote up a list of 5 stocks over $300 a share that I think are worth every penny, and I encourage all investors to give that list a serious look.
But I must admit that the desire to buy cheap stocks is a popular one, so I decided to comb through the market to find some potential investments. Mind you, the following list is not a group of recommendations — simply a list of legitimate stocks with cheap share prices that you should use as a jumping off point, and research yourself.
My methodology was to limit picks to a minimum of $300 million in market cap and 200,000 in daily share volume (and any less than 500,000 is expressly noted below). That would provide some measure of liquidity and stability. I also demanded the companies be profitable, not start-up phase biotechs or other money-bleeding enterprises. I then started crunching numbers for some of the more attractive companies and sectors in this list of a few hundred companies, and the result are these 15 picks with my few sentences of insight to explain why I think each stock is a “real” investment.
It’s hardly a sure thing and definitely not an intensive investigation into each stock, so please do your own research or post follow-up comments below. But disclaimers aside, I think this is at least a good place to start for investors looking for cheap stocks.
So if you’re hunting for bargains, begin by browsing these 7 stocks under $5:
Cincinnati Bell (NYSE:CBB) is one of those rare telecoms that does not pay a dividend, so don’t get into this pick because of the income. However, it is soundly profitable and has a reliable customer base.
Last week, Benchmark Co. reiterated its buy rating on shares of CBB with a $6 target on the stock — 50% upside from here. Also, it’s probably not unrealistic to expect a bigger telecommunications company may offer a buyout in the near future — if for nothing other than its Texas data centers.
Shares are up 31% YTD and the company reports earnings on July 30. Be warned, however, that the forward P/E of about 17 is a bit rich considering the industry.
Giant Interactive (NYSE:GA) is an online game developer in China, particularly in the massive online role-playing game space. Think World of Warcraft by Activision Blizzard (NASDAQ:ATVI) or other China gaming stocks like Shanda Games Limited (NASDAQ:GAME).
I won’t pretend to understand its Zheng Tu series since I don’t play video games online (anymore) and I don’t speak Chinese. But generally speaking, this market is seeing big growth worldwide and especially in China as the nation gets more wired.
Giant Interactive has seen seven straight quarters of improving revenue, though bigger profits have been harder to squeeze out. The forward P/E is less than 6 based on 2013 earnings. GA stock reports earnings on August 6, and is up about 18% year-to-date.
Crown Media Holdings (NASDAQ:CRWN) is the network behind the Hallmark Channel and the Hallmark Movie Channel. I personally wouldn’t be caught dead watching The Martha Stewart Show, but to each his or her own. After all somebody is watching.
This company has managed to post a nearly 50% jump in share prices so far in 2012 and has seen six straight quarters of revenue growth. Of course, expectations are difficult to beat because just about no analysts are even watching this stock so it’s hard to know whether its growth is good, bad or ho-hum.
Crown Media reports earnings July 27. (Note: This stock does indeed have low volume of around 200,000 shares daily, so please use a limit order if you want to trade this company. It is illiquid and a big purchase could skew share prices.)
Synovus Financial (NYSE:SNV) is one of the many cheap bank stocks out there right now. SNV has finally returned to profitability, being back in the black this year after trouble in the wake of the financial crisis. That means its 1 cent quarterly dividend could be going up in 2013 presuming the improvements continue and the reserves are socked away.
Oh, and by the way, the 1 cent dividend is a nice 2% yield considering the $2 share price. Beware that SNV is, after all, a bank — and thus the uncertainty surrounding bad housing debt and financial reform apply here as they do to the big boys. But frankly, banks mostly move in lockstep these days so it may not make much difference which bank you invest in.
If you’re looking cheap, SNV is an option. It reports earnings July 24, and shares are up about 40% year-to-date.
United Microelectronics (NYSE:UMC) is a Taiwan semiconductor manufacturer that is in the right place for the high-tech revolution, as it is the second-largest foundry in terms of market share. It supplies big boys including American tech giants IBM (NYSE:IBM) and Qualcomm (NASDSAQ:QCOM), among others.
Shares are down slightly year-to-date and off about 15% in the last year due to a slowdown in new orders. But the company pays a decent but fairly volatile 2.8% dividend, and semiconductor stocks should get a boost if and when a consumer or business recovery takes shape.
Mizuho Financial (NYSE:MFG) is another bank stock, but this one is in Japan and trades as an ADR on U.S. exchanges. Despite the share price under $4, the company has a market cap approaching $40 billion. A big selling point is the plump dividend, $4.77 on an annualized basis though it is paid just once a year and not until the spring. Still, the stock is up 20% year-to-date not counting dividends and could be a decent alternative to domestic banks if you’re looking for diversification into financials but without the pain of another London Whale.
Wendy’s (NASDAQ:WEN) was part of a list of under $10 stocks I made back in April, and since its price hasn’t budged much from around $5, I include it again. The sale of lagging Arby’s Restaurant Group backed out some revenue and restructuring costs have been a short-term drag, but Wendy’s is ahead of some fast food rivals by focusing on a healthy and fresh menu.
Also, the leadership of Emil Brolick — who successfully rejuvenated fast-food giant Yum! Brands (NYSE:YUM) through international expansion is a huge plus, too. Wendy’s has a lot of room to grow internationally, and that’s a double-edged sword. If Wendy’s locations take they will be a big boost to the bottom line. But the burger joint is late to the expansion into Latin America and China, Wendy’s may not see profits materialize.
Wendy’s is roughly flat year-to-date in 2012, and reports earnings August 9.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing he did not own a position in any of the stocks named here.
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