Finding the best cheap stocks to buy is no easy task for investors. Some cheap stocks have crashed and burned from great heights and have negative headlines hanging over them. Other cheap stocks are merely microcap penny stocks that are unproven and highly volatile, trading largely on sentiment and divorced from fundamentals.
Cheap stocks are inherently risky because of this.
However, of all the stocks out there under $10 or so right now, I think the best cheap stock to buy is Groupon (GRPN).
It might surprise you to hear this kind of endorsement for the daily deals company that many investors have written off for dead. After all, the crash and burn of its boyish CEO Andrew Mason — alongside the crash of the stock from $25 to about $2.50 — was a pretty big deal a few years ago.
But GRPN has actually staged a pretty impressive turnaround in the past year. After the departure of Mason, strategic changes and analyst upgrades resulted in the stock surging across 2013; while it still is a cheap stock, shares of Groupon stock are actually up about 150% since bottoming in late 2012.
Groupon is one of the best cheap stocks to buy because it appears to be soundly on the path to profitability and remains a pretty attractive acquisition target from big players like Google (GOOG, GOOGL) and Amazon (AMZN) that want scale in the “daily deals” space. Groupon also continues to reinvent itself — selling physical items via Groupon Goods instead of just coupons, offering bulk shopping via Groupon Basics and further branching out into e-commerce instead of just marketing/advertising.
With a forward price-to-earnings of about 26, GRPN still is risky but much more fairly priced than a lot of other tech darlings out there. And given its history and investor pessimism, you still have time to enter at a good price and ride the wave higher.
Of course, Groupon stock has been battered once more in 2014, losing about 40% year-to-date after soft earnings in February and then a fiscal Q1 report in May that showed weak guidance … so some of the gains since early 2013 also have evaporated.
But considering GRPN boasts $1 billion in cash and no debt, Groupon investors should have some peace of mind in this cheap stock.
Remember, finding the best cheap stocks involves taking some kind of leap of faith. Given the fair valuation on future earnings and the cash cushion, I think there is enough reason to be bullish on this stock in spite of recent troubles.
And unlike microcap penny stocks that can evaporate overnight, at least you have the stability of a high-volume equity with more than $1 billion in cash in your portfolio.
That counts for something, too.
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.