by Jeff Reeves | April 24, 2014 1:14 pm
Finding a good investment for around $5 is not an easy task.
After all, most publicly traded stocks with a low share price got that bargain valuation by running into trouble — as in, enjoying a share price of $10 or $20 several years ago and now trading at a deep discount thanks to pessimistic investor sentiment.
However, shrewd investors can find some good stocks to buy in the Wall Street bargain bin if they know where to look.
While the following stocks are admittedly a bit risky and have some issues, they all are established companies that are worth more than $300 million and are at worst breakeven. That means these bargain stocks to buy have no risk of going bankrupt anytime soon … even if they have admittedly faced some challenges in the last few years.
Advanced Semiconductor Engineering (ASX) builds and distributes integrated circuits and other electronics. While that’s not as sexy as other chipmakers that play to mobile, it’s still a good business, considering the general demand for microchips in everything from cars to computers to TVs.
The Taiwan-based company is close to many Asian electronics manufacturers. And regardless of whether those manufacturers crank out something as hot as the iPhone from Apple (AAPL), ASX still will have a strong baseline simply because of how many high-tech devices exist in the world.
Moreover, ASX is not a chip designer, just a manufacturer. That means while it doesn’t have the same big margins as the companies who create the next hot chip, it also doesn’t have the same risk to get it right with R&D. Advanced Semiconductor’s diverse business makes it a stable player for the long haul, and not as finicky as companies that rely heavily on laptops an desktops. That stability also is reflected in the form of a 3% dividend yield.
In a post-PC age, there are assuredly sexier tech plays out there. But ASX is up 35% in the last year and about 20% YTD. With a decent dividend, decent revenue and profit growth and momentum for share prices, ASX could be the best stock to buy for around the $5 mark right now.
Specialty retailer Aeropostale (ARO) certainly wouldn’t be categorized as a growth stock. The company has seen stagnant revenue for some time, and is currently operating in the red.
But after crashing over 60% in the last year, the collapse in ARO stock might now be a bit overdone. Sure, margins were pinched and sales have gone nowhere … but Aeropostale is on track to return to profitability this year as it closes about 50 stores in 2014 and might close more than a hundred more after that.
Furthermore, let’s not act like ARO is alone. Many teen retailers including Gap (GPS) and Abercrombie & Fitch (ANF) have been hit by a horrible group of negative pressures in the last few years that include:
This undoubtedly has created challenges, but ARO is right-sized for the current environment and all the negativity has been priced in. Investors who buy this $5 stock now could see a big pop once the stock returns to profitability in a few quarters, and continued improvement on employment and spending data could bode well for retail sales across the board.
An added sweetener: There are rumors of an Aeropostale buyout by private equity to unlock value through cost cutting and restructuring. That certainly would come at a premium, perhaps at $7 or $8 a share, and result in a quick but substantial pop to any shareholders.
Oil stocks haven’t really been all that kind to investors over the last few years as weak pricing coupled with weaker energy demand in emerging markets has hurt the bottom line.
But one area of the energy sector worth looking at is offshore oil drillers, including leader Hercules Offshore (HERO). While oil prices are soft, the bottom line is that the world’s easy oil is gone and energy companies are increasingly turning to harder-to-access offshore oil and gas fields in order to bolster reserves … and that means big business for servicers like HERO.
Now, Hercules’ stock price sits at roughly half of its 2013 peak and has run into trouble since its largely shallow-water business hasn’t been booming. But the company divested a number of barge-based rigs in 2013, and is about breakeven right now.
While it’s unlikely that we will see a surge in oil prices leading to a surge in drilling contracts, the good news is that HERO appears to be right-sized now for the current market environment and has decent upside potential if investment in oil and gas drilling stays strong.
After a big drop during the past few years, much of the negativity has been priced into the energy sector broadly and this sub-$5 stock in particular.
While the office supply game surely isn’t what it used to be thanks to e-commerce and online orders, there is hope for fallen giant Office Depot (ODP).
Office Depot merged with the struggling OfficeMax last year, which will generate big cost savings in the coming year; in 2014, the company is expected to return to profitability once more.
Look, nobody is impressed by ODP’s performance in the last few quarters. Consider this quote from Office Depot CEO Roland Smith in February after bad quarterly numbers: “While (fourth-quarter) results were clearly disappointing, they shouldn’t be a big surprise.” Furthermore, Office Depot warned that it expects sales to decline in 2014 as it restructures and closes underperforming stores.
The Office Depot-OfficeMax merger, however, changes the story here. The company is still battered based on its past history, and trading at a deep discount to its future sales and profits. Consider that ODP has about $1 billion in cash on hand and won’t see most of its debt come due until 2019, giving it a pretty nice cash cushion.
The downside in Office Depot appears limited now that the office space has consolidated and the pressures of e-commerce have been baked in. A secular recovery could increase hiring and business spending, and result in better sales for ODP as a result.
This still is a risky $5 stock, to be sure, but the worst does appear over for Office Depot.
Gramercy Property Trust (GPT) is a real estate investment trust that manages mainly industrial and office properties across the U.S. As of last year, GPT controlled more than 110 buildings with about 4.2 million square feet of office space and 1.5 million square feet of industrial space.
Right now, GPT is struggling to break even on the heels of five new property acquisitions in 2013. However, in March, GPT paid its first dividend since 2007, so things are looking up.
Compared with other REITs, the roughly 3% yield isn’t amazing … and besides, you have to annualize the 4-cent payout and trust it’s going to be there in the coming quarters. Also, shares are down about 7% so far in 2014 despite the reinstated payouts.
However, a recovery in the broader U.S. economy could lift demand for business real estate and result in bigger revenue and profit for GPT.
If you’re looking for a cyclical way to play the recovery and want to get in on a good long-term dividend investment, Gramercy Property might be among the best stocks to buy right now.
GPT stock is down about 80% from its 2007 peak, and its dividends remain a fraction of past payouts.
Still, even if Gramercy only gets part of the way back to where it was several years ago, investors will be rewarded handsomely.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.
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