by Jeff Reeves | August 14, 2014 3:20 pm
Cheap stocks to buy are enticing for many investors, because the theory is that a low-priced company can double faster from $5 to $10 than a high-priced company can double from $50 to $100 per share.
For the record, this is the biggest load of baloney in the world — cheap stocks do not guarantee faster or bigger returns, and those looking for the “best” cheap stocks to buy need to understand that many low-priced equities are low because they’ve crashed and burned.
Let me prove these two points with RadioShack (RSH) and with Chipotle (CMG).
RadioShack was a cheap stock in early 2012 at under $7 a share and paying a 13-cent dividend … and now RSH stock trades at around 60 cents, and that dividend is long gone. At the same time, Chipotle certainly was not a cheap stock in 2012, trading at its lowest for around $250 for a single share. Now CMG stock is pushing $680.
So you see, finding cheap stocks to buy only works if you are actually finding a good stock. Whether it trades for a few bucks per share is academic; only the underlying business matters.
But since so many people love cheap stocks and throw their money after dangerous investments, I consider this list a public service. If you’re gonna swim with the sharks, hopefully this article on cheap stocks to buy will arm you with some good information.
So disclaimers aside, here are my top 10 stocks under $10 for those of you looking at cheap stocks to buy now.
Price as of 8/14/14: $9.24
I just named CYS Investments (CYS) as one of my favorite high-dividend REITs to buy now. CYS is a real estate investment trust that doesn’t actually own any physical real estate. Instead, CYS trades in mortgage-backed securities.
A low-interest-rate environment has allowed so-called mREITs like CYS to make a lot of money trading mortgage paper as the housing market has recovered. Of course, the big issue is that CYS is sensitive to interest-rate risk should rates rise and eat into the spreads of its loan portfolio.
We saw that in 2013, as CYS stock fell about 22% on the year.
However, the stock was so oversold it briefly traded below its net asset value. And since then, investors in REITs like CYS have realized the selloff was a bit overdone. Shares are up 25% year-to-date, and the company has returned to profitability this year, looking to easily cover the 32 cents per share in quarterly dividends it is paying.
And that dividend adds up to an amazing 14% yield at current pricing.
CYS could have another strong year or two, with modestly low rates providing a tailwind, and with a juicy yield and momentum behind shares, it’s hard to pooh-pooh this stock as a fad.
Price as of 8/14/14: $7.04
Since low-priced stocks are frequently high risk shots at big returns, what would a list of cheap stocks to buy be without a biotech play in there that could either win big or lose painfully.
One interesting cheap stock in the biotech space right now is MannKind (MNKD).
MannKind has developed a diabetes treatment, Afrezza, that has shown promise. However, the company also recently entered into an agreement with Sanofi (SNY) to market and sell the drug — giving it just 35% of the upside instead of 100%.
Of course, that also insulates MNKD at just 35% of any potential losses, too.
Shares of MNKD are up 35% in 2014, though they have indeed rolled back from highs in June in part because of this partnership. However, the deal is better than some investors think.
Sanofi actually offered $150 million up front to MannKind as a result of the partnership and also is backstopping some of the financing to roll out Afreeza at scale. For a money-losing, development stage biotech company … this is actually a pretty decent deal.
Furthermore, the relationship here could eventually lead to a buyout — which would provide an instant pop to MNKD shareholders down the road.
There are risks that the drug won’t catch on, or that MannKind has given up too much of its upside to Sanofi. But if you’re looking for a cheap stock in the biotech sector that has big upside potential but limited risk, MNKD is one good option.
Price as of 8/14/14: $6.84
While we’re talking biotech, I’ll also offer up Northwest Biotherapeutics (NWBO) as an option.
Northwest is your typical big-risk, big-reward biotech small-cap stock. The $330 million company is unprofitable as it burns cash on expensive drug research and trials, primarily regarding treatments that are designed to help patients’ own immune systems gain strength and fight off certain kinds of cancer. Some of the most promising treatments right now target brain cancer and prostate cancer.
You can read more on NWBO trials and treatments here and elsewhere around the web, but the bottom line is that this is a speculative stock that will live or die based on the success of its current research and subsequent FDA approval.
Shares have been quite volatile long-term, but it’s worth noting that Northwest Biotherapeutics is up about 80% year-to-date and has been pretty stable since mid-June.
Shares still trade around $6.80 apiece, however, so if you want to take a flyer on tomorrow’s cancer cures, then consider a small position in NWBO. Just make sure you understand the risk and volatility involved with unprofitable, early-stage biotech stocks like this.
They can rack up big wins, but also big losses if things don’t go right.
Price as of 8/14/14: $9.05
I named BlackRock Kelso Capital Corp. (BKCC) in my best cheap stocks under $10 to buy in June. And while shares have gone nowhere, BKCC stock does continue to boast a massive 9.3% dividend yield based on its last payout of 21 cents per share quarterly.
That means even if shares continue to see pressure, you’ll still make a decent return on this cheap stock.
BKCC is a business development company, or BDC, which generates revenue from investments in and loans to midsized companies. As that capital generates returns, BlackRock Kelso shares generate big dividends.
Of course, that means BKCC lives and dies by its underlying investments. You can look into its full list of investments here for more detail … but the good news is that, broadly, the American economy continues to improve and there appears to be a durable recovery underway.
If the economy picks up steam and more midsize companies look to expand, BlackRock Kelso will benefit handsomely. This company’s great dividend and the fact it trades for a roughly 10% discount to its book value also are big pluses.
Price as of 8/14/14: $3.24
Oil stocks haven’t really been all that kind to investors over the last few years. Weak pricing coupled with weaker energy demand in emerging markets has hurt the bottom line.
However, long-term investors should always have some energy exposure in their portfolio. And while fracking is all the rage right now, there’s no denying that a lot of the “easy” onshore energy is gone and energy companies will increasingly have to explore offshore and deepwater oil fields to keep up with global demand.
There’s where drilling services company Hercules Offshore (HERO) comes in.
Now, Hercules’ stock price is down more than 55% in the last year thanks to a lot of short-selling, some analyst downgrades and a painful restructuring But the company divested a number of barge-based rigs in 2013, and has posted a profit in five of the last six quarters — with revenue growth to boot. The company is going to finish fiscal 2014 in the black, and is trading for a paltry 8 times its forward earnings.
Now oil stocks will never trade for a mammoth premium, but at worst, HERO is fairly valued after the crash — and its improved balance sheet shows this stock is not going to disappear.
It might take some time to turn around the sentiment, but I’d be confident in making an investment despite the big drop because Hercules is profitable and it operates in a business that is sure to have decent baseline demand — if not growth — in the years ahead.
Price as of 8/14/14: $9.79
AK Steel (AKS) is a boring materials stock that does just what you think it does — produces steel, for use in industrial and electrical applications.
Commodity stocks have certainly taken it on the chin in recent years, thanks to the one-two punch of the commodity crash of 2008 depressing prices and the Great Recession and emerging-market slowdown sapping demand.
But after bottoming at less than $3 a share last year, prices have more than tripled to current levels and there is a decided tailwind behind this stock despite its single-digit share price.
The worst of the commodity crash seems to be over, with stable pricing for materials and most materials stocks right-sized for weaker demand out of China and the West. AK Steel is forecast to nearly break even in fiscal 2014 and return to a decent profit in 2014 as a result.
Investors are starting to see the value here, since even after a 17% run year-to-date AKS stock trades for just eight times fiscal 2015 earnings.
There is undoubtedly risk here, since AK Steel is a cyclical stock that does best amid strong industrial and manufacturing demand. But if you believe the worst is behind us, this materials stock will give you a good foothold in the resurgence of global manufacturing in the years ahead.
Price as of 8/14/14: $7.42
Great Lakes Dredge & Dock (GLDD) is another rather boring, cyclical company that hasn’t gotten a lot of love over the past few years.
For those unfamiliar with the process, dredging involves underwater excavation. Typically this involves either deepening shipping lanes to facilitate travel, or moving sand in beach replenishment efforts to protect against erosion. Great Lakes serves not just its namesake region, but also the East Coast, West Coast and Gulf of Mexico regions.
Now, GLDD has had a rough go since its initial rebound during the 2009 snapback. Since early 2012, the stock is up about 30% to deliver only half the profits of the broader market. Furthermore, GLDD cancelled its dividend in 2012 and burned a lot of long-time investors.
Great Lakes has had trouble staying above $9 for long, and last year the stock saw trouble as earnings releases kept getting pushed back — culminated at last by a restatement of two quarters of results this spring, and the resignation of the current COO and former CFO Bruce Biemeck as a result. It’s always hard to trust a company that has fishy accounting practices, and Wall Street hasn’t been kind to been brutal to GLDD stock since April as a result.
However, the company is indeed profitable … and while it’s trading for a pretty rich 16 times future earnings, Wall Street could very well be lowballing those targets because of past accounting transgressions.
It’s a risky play, to be sure. But what with increased industrial and manufacturing business in the U.S., shipping lanes are increasingly important and governments are finally seeing a recovery in their tax base to allow dredging projects to take place — particularly now that America can export crude oil.
GLDD is a cyclical play, with a black eye from recent accounting troubles. But hey, cheap stocks are cheap for a reason … and this pick might be worth a flyer after its fall from grace.
Price as of 8/14/14: $7.14
In the age of mobile, old-school semiconductor companies aren’t very popular. But Siliconware Precision Industries (SPIL) has grown a diversified business, serving chipmakers with packaging and testing gear. While its customers are indeed in the telecom and personal computer space, the bottom line is that demand for these kind of chips remains decent — and thus demand for SPIL services is strong even if the company isn’t quite the growth engine it used to be.
Consider that while shares went nowhere from 2010 through 2013, the stock recently gapped up from under $6 in February to a high of about $9 in advance of its annual dividend payment. Many investors bailed out after that dividend capture, but the payment was the highest since 2010, and shares remain up an impressive 20% YTD despite the selloff.
Furthermore, SPIL typically sells off after its dividend, then ramps back up in the early part of the year — meaning that if you purchase now at the bottom, you can enjoy that annual run-up in the winter and spring before next year’s payout.
Back in April, Siliconware Precision was one of 18 companies to receive the 2013 Intel Preferred Quality Supplier award. Intel recognized SPIL because it is committed to “performance excellence and continuous improvement” and for helping Intel enhance their silicon, packaging and test technologies.
It’s not just dividends pushing SPIL higher, however. Q2 revenues jumped 21% year-over-year and the company posted a near-doubling of earnings.
Siliconware isn’t as sexy as a social media or cloud stock. But at about $9 per share, SPIL might be your best bargain in tech right now on the selloff of the last several weeks.
Price as of 8/14/14: $9.68
Huntington Bancshares (HBAN) has largely tracked the rest of the market in the past year, up 12% vs. 14% for the S&P 500 in that period. However, as a $7.9 billion bank with operations mainly in the Midwest, this cyclical financial play could be a great way to gain exposure to the long-term recovery taking shape across America.
HBAN operates from Michigan to West Virginia — areas that haven’t been especially booming in the last few years — but has smart plans to squeeze more growth from its home region. For starters, Huntington operates wealth management businesses now in Florida — a shrewd move, considering many Midwest retirees relocate to Florida (with their cash) as they age.
The company also has aggressively increased its auto loan footprint to make up for a flat-lining housing market across much of the Midwest. In fact, its Q2 earnings beat expectations with 9% year-over-year growth in large part because of a massive 39% jump in auto loans.
Huntington currently offers a modest 5-cent dividend per quarter, good for a 2.1% yield. However, as earnings mend and the Federal Reserve allows for increases, it’s not unrealistic to expect Huntington’s payouts to double over the next few years.
This is a cyclical play, make no mistake — and if the economy softens up and the economy heads south, so will HBAN. But considering the momentum of the U.S. recovery, this regional bank is worth a buy under $10 per share.
Price as of 8/14/14: $4.49
Exco Resources (XCO) is an onshore oil and natural gas play focused mainly on shale operations. Its focus is on using horizontal drilling to extract gas from shale formations in east Texas, north Louisiana, Appalachia and the Permian Basin in west Texas.
XCO has underperformed of late — it’s off 15% in 2014 and about 40% in the past 12 months — but it’s one of a number of oil and gas small-cap stocks that could make for great buys in the longer term.
But as I’ve said before, if you’re looking for cheap stocks to buy … you have to admit that many of these players are cheap for a reason.
Exco has been right-sizing itself for several years, including a big drilling rig reduction (from 24 to five) in 2012, as well as shaving 60% of its contractors and a sixth of its full-time workers. XCO has been working on reducing debt to improve liquidity — including a partnership made last year with Phil Falcone’s iconic Harbinger Group — to improve its capital structure.
Unfortunately, the harsh environment for energy stocks seems to have persisted. While earnings for Exco have certainly stabilized and the company is projecting a full-year profit in 2014 on rising revenue, the company trades at 22times future earnings.
The fact that the stock offers a highly sustainable 4.5% dividend is nice … but the underperformance of this stock is certainly a big, red flag for investors looking at XCO among cheap stocks to buy now.
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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