Finding the best cheap stocks is not simply about looking at price. There are a host of stocks that have sold off for good reason, particularly in a bear market like this one, and a low share price doesn’t mean a bargain.
Or as the old Warren Buffett quote goes, “Price is what you pay, but value is what you get.”
The key when looking for the best cheap stocks to buy, then, is to focus on companies that are either unfairly oversold thanks to broader market negativity, or stocks with a catalyst for a breakout like a possible acquisition. Uncertainty tends to be the rule, of course, but higher risk can bring much higher reward in these cheap stocks should things go their way
It’s also worth pointing out that volatility is the norm, even in the best cheap stocks to buy now. That’s because many cheap stocks trade on relatively thin volume or with small market capitalizations that make them more prone to big moves on little or even no news.
If you are OK with the risks, however, there can be a lot of profit to be had in stocks that trade for under $10. And if you’re looking for the best cheap stocks to buy now, this list is a great place to start.
Best Cheap Stocks to Buy Now – Lake Shore Gold Corp (LSG)
Price Per Share: ~$1.30
Market Cap: $600 million
Industry: Metals & Mining
Small-cap gold miners have been some of the best performers in 2016, thanks to a “risk off” environment that has been driving a move into gold. But while a play in physical gold may be wise, either via bullion itself or a bullion-backed ETF like the SPDR Gold Trust (ETF) (NYSEARCA:GLD), the big underperformance of gold miners in 2015 means much more room to run higher now that the dust has settled.
Of course, that kind of investment requires a little bit of research. While some miners are set to rebound, others are still unprofitable operations suffering under huge debts. So investors need to be discerning before they just run out and buy a cheap gold mining stock.
One miner you can have faith in is Lake Shore Gold (NYSEMKT:LSG), which is trading for under $2 right now, even after surging nearly 70% in the past six months. The company was brutalized in the back half of 2015, but somehow managed to turn a small profit despite the harsh environment for commodity pricing. And now that gold prices are moving higher, LSG stock is primed to benefit nicely — particularly since it was already limiting costs and only has a modest debt load of about $70 million.
The trick is that gold has to stay in favor, of course, for this trade to work. But given the investing environment, even a strong dollar shouldn’t matter much in the months ahead for this cheap stock.
Best Cheap Stocks to Buy Now – Glu Mobile Inc. (GLUU)
Price Per Share: ~$3.40
Market Cap: $445 million
Industry: Video games
Glu Mobile (NASDAQ:GLUU) has been a pretty disappointing long-term investment: The company has consistently struggled to turn a profit for years now despite pretty strong revenue growth.
But while it’s true that mobile gaming is a crap shoot and there’s no accounting for rapidly changing consumer tastes, Glu Mobile isn’t just a cheap software company that you’re buying on a wing and a prayer.
China’s Tencent Holdings (OTCMKTS:TCEHY), an Asian internet technology giant, just raised its stake to 21.5% of GLUU shares, according to reports. There have long been rumblings that Glu Mobile is potential buyout bait for a larger tech player, but this is the clearest sign yet that a deal could be in the works reasonably soon for this cheap stock.
While GLUU is still down a little over 50% from its 52-week high last summer, the interest from the Chinese powerhouse could be just the spark Glu Mobile needs to move significantly higher in short order. That makes GLUU one of the best cheap stocks to buy now.
Best Cheap Stocks to Buy Now – Groupon Inc (GRPN)
Stock Price: ~$4.60
Market Cap: $2.6 billion
Industry: Internet retail
Speaking of buyout interest, big gains have also been made in Groupon (NASDAQ:GRPN) this year after Alibaba Group Holding Ltd (NYSE:BABA) disclosed a modest stake in the digital deal and e-commerce company.
Alibaba’s 5.6% stake, like the Tencent stake in GLUU, could hint that the Asia mega-cap could be exploring an outright acquisition. But that’s not the only positive headline for GRPN stock in 2016.
Fourth-quarter earnings showed strong North American billings, 11% year-over-year, which should give hope to investors. Furthermore, the Groupon Goods segment — that is, e-commerce operations, instead of just the sale of deals and coupons — was up 17% in North America in fiscal 2015 over 2014, for almost $1.3 billion in total sales. That hints at a future for GRPN stock, even if the daily deals it has been known for slip.
As for valuation, even after a big move of nearly 50% year-to-date, GRPN stock trades for a slight discount to projected fiscal 2016 sales. That means there are a lot of paths higher with this cheap stock since it operates at a profit and has almost zero debt.
If its price history is any indication, Groupon stock will certainly be volatile. But that could be a good thing for traders if the next dramatic move is a leg higher.
Best Cheap Stocks to Buy Now – Iconix Brand Group, Inc (ICON)
Stock Price: ~$8.60
Market Cap: $400 million
Industry: Apparel retail
Iconix (NASDAQ:ICON) may not be a household name for consumers, but its brands — including Candie’s, Joe Boxer, Mudd, London Fog, Mossimo, Umbro and Ocean Pacific, among others — are well-known.
And for investors, ICON stock may not have been a core holding of their portfolio, but they probably took notice of the pick in a big way late last year when an SEC investigation into its accounting practices was announced and erased half of the company’s value in a single trading session.
But while the investigation is certainly a serious issue and raises a huge red flag, ICON has now restated its financials dating back all the way back to 2013. Furthermore, the highest levels of the company have been cleaned out and a new CEO has been named. John N. Haugh has joined the company and will become chief executive on Apr. 1, bringing experience from other big consumer companies including Luxottica Group SpA (ADR) (NYSE:LUX), Build-A-Bear Workshop, Inc (NYSE:BBW) and Mars Inc.
There are always huge risks involved in a battered name with accounting irregularities. And to be honest, most of the best cheap stocks to buy now have risks — or else they wouldn’t be cheap in the first place. But the worst appears to be over, at least as evidenced by a strong rally of more than 25% year-to-date and continued efforts to make good with investigators.
It’s a risky bet to jump into Iconix before this is settled, to be sure, but it could be a profitable one.
Best Cheap Stocks to Buy Now – United Microelectronics Corp (ADR) (UMC)
Stock Price: ~$2.10
Market Cap: $5.2 billion
Industry: Semiconductors
Last year we saw a flurry of mergers and acquisitions in the chip-making space. Each deal prompted another deal because after the first companies combined forces, it forced smaller peers to scale up in kind to compete — for instance, when Avago Technologies Ltd (NASDAQ:AVGO) bought Broadcom Ltd for $37 billion, Intel Corporation (NASDAQ:INTC) teamed up with Altera Corporation shortly afterwards.
I mean, let’s face it: Organic growth or “disruptive” innovation isn’t really an option here, particularly for companies that are a decade or so behind on the shift to mobile. Better to just grow via acquisition, or at least cut costs and protect margins via industry consolidation.
That’s basically the argument for why I would recommend United Microelectronics (NYSE:UMC) here — because as a cheap chip stock, it’s bound to be bought by somebody.
It helps that UMC is independently profitable, and that it pays a juicy dividend of just less than 4% based on its previous annual payout of 8 cents.
It also helps that UMC is a small player in solar and LED lighting as it looks to evolve with the future of electronics.
But make no mistake: This pick makes the ‘best cheap stocks to buy now’ list solely on hopes of a buyout offer in the near future. And considering the premium baked into this stock with a 25%-plus leap since mid-January, many investors haven’t given up on the expectation of a merger in 2016.
Best Cheap Stocks to Buy Now – Prospect Capital Corporation (PSEC)
Stock Price: ~$7.45
Market Cap: $2.6 billion
Industry: Financial services
Prospect Capital (NASDAQ:PSEC) is a financial services company that aims to generate long-term capital appreciation for shareholders through investments, most notably through loans and private equity investments in middle-market corporations.
Admittedly, the last year or so has been ugly for such private equity investments. According to a recent CNBC report:
“Leveraged buyout firms did a paltry 116 deals globally in January, according to data from Dealogic, which tracks and analyzes mergers and acquisitions. It’s less M&A by volume than the industry has done in the month of January in more than a decade.”
But as asset prices continue to fall and as conventional investments in stocks and bonds remain unattractive in the current environment, it’s only a matter of time before private equity gets its groove back. And as credit markets remain less than ideal, companies like PSEC can make a pretty penny extending loans to corporations that have trouble getting good financing arrangements elsewhere.
It’s a risky business to buy out distressed corporations or operate as a lender of (almost) last resort. But when there’s plenty of capital returns to be made in public markets via stocks and bonds, investors can simply rely on business as usual … in this challenging environment, the idea of a business development company like PSEC seems less of a stretch given the alternatives.
Of course, it doesn’t hurt that Prospect Capital also offers up a juicy 13.5% annual dividend yield with monthly distributions on top of the potential for capital appreciation.
Best Cheap Stocks to Buy Now – Gramercy Property Trust (GPT)
Stock Price: ~$7.80
Market Cap: $3.3 billion
Industry: Office REITs
Gramercy Property Trust (NYSE:GPT) is a commercial real estate company that owns some 300 properties with 56 million square feet of space for tenants. The business model is simple: Own a bunch of quality office spaces, lease them out and return the cash to shareholders.
As a result, GPT offers a tremendous dividend yield of 16.9% that more than offsets any sleepy share price history.
GPT recently posted strong earnings after a merger with Chambers Street last year, and the consolidation should continue to fuel results across 2016. Furthermore, Gramercy continues to chase international with its first U.K. warehouse purchase recently – one of 10 deals in the last six months.
Admittedly, you’re not going to get a lot of fireworks out of this REIT. But a big dividend yield coupled with serious international operations will add stability to your portfolio in a time of market turmoil.
As investors continue to go “risk off” and seek out safe havens, this real estate investment trust is a prime candidate to attract capital in the months ahead.
Best Cheap Stocks to Buy Now – Regions Financial Corp (RF)
Stock Price: ~$8
Market Cap: $11 billion
Industry: Regional banking
Financial stocks have had a rough go of it for the last few years, even if profits have been up. That’s because “branchless” electronic banking has prompted a rash of consolidation and layoffs to juice margins, while there simply isn’t any growth in actual banking and lending.
And on the surface, with rates at rock bottom and looking to stay there despite a measly 25-basis-point increase from the Federal Reserve in December, it looks like more of the same.
But, while admittedly things aren’t grand in banking, Regions Financial (NYSE:RF) offers a decent long-term bet for investors right now. That’s because the last six or seven years of cost cutting and risk management have allowed the financial play to boost capital levels nicely, improve its credit quality and make its operations among the most attractive in all of regional banking.
In fact, revenue has increased year-over-year in each of the past four quarters — not bad, considering top line troubles elsewhere in the financial sector. Furthermore, the company trades at a tremendous 35% discount to its book value.
Not only do these factors make RF stock a decent bet for your portfolio, but they also hint that Regions could make an attractive acquisition target for larger banks looking to find growth by rolling up a smaller player. The company has shown it has staying power and can actually find growth, and recent guidance for FY2016 reinforces that with projected loan growth and deposit growth in the low- to mid-single-digits in both categories.
With a 3.2% dividend and metrics like these, investors can have confidence that RF stock will hold steady and protect their finances even in a choppy market.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.
