It is well known that low-priced stocks generate the biggest returns in the market. Stocks under $5 tend to be smaller companies, but as we have seen during this last recession, plenty of big companies are trading under $5 per share, as well.
Whatever your preference, large or small, you can do well riding the momentum of inexpensive stocks. It is far easier for a sub-$5 stock to double in value than it is for a $500 stock to do the same. All that is needed is a reasonable valuation and strong earnings growth.
The larger extent to which companies trading under $5 serve monster markets, the better. It is that potential that is likely to be bid up. Prove that potential with demonstrated earnings growth, and away you go.
Here are five of my favorite stocks trading for under $5 per share.
Opko Health (NYSE:OPK) is in the business of treatment and medical products for ailments in the ophthalmic field. The company has a variety of drugs and medical devices on the market and several treatments in various stages of testing. Success at any level puts the company in monster market mode.
The company currently has a market cap of just more than $1 billion. With shares under $5, the potential exists to double or triple that valuation during the next few years. Opko is up 19% in 2011. Earlier in the year, shares rallied close to $5 per share, only to slip back. During the past month, the stock has looked primed to make another run at $5 per share.
It last approached $5 before the recession in early 2007, putting it in the minority of companies trading at less than pre-crisis levels. I view such a state as an opportunity. In the years since last peaking near $5 per share, the company is only further along in bringing new products to market. If it breaks through $5, it might not stop.
Great Basin Gold
Uncertainty in the market is causing the price of gold to skyrocket. The media tends to focus on bullion prices. The yellow metal closed above $1,600 per ounce Monday, marking several days of upward movement thanks to the U.S. debt ceiling debate and European sovereign debt issues.
When gold prices surge as they have done, gold mining companies typically lag. Great Basin Gold (NYSE:GBG) actually saw its share price collapse in May from $2.60 per share to $1.80. With the gains in gold of late, the stock has rallied back to around $2.20 per share.
Analysts expect GBG to more than double its earnings from this year to the next, yet shares only trade for 23 times 2011 estimates and eight times 2012 estimates. With gold expected to remain high or keep rising, GBG likely will do better than expected.
Voice over Internet Protocol darling Vonage (NYSE:VG) appears to be hitting its stride. The company had been a big bust, as a hot initial public offering quickly evaporated. At one point, Vonage traded for less than 50 cents per share.
That was in September 2009. Since then, the company has been laser-focused in adding subscribers to its services, including overseas dialing via the Internet. That focus has resulted in the company netting a quarterly profit in each of the past two quarters, and a stock price of around $4 per share. Those profits are expected to incrementally increase.
Last quarter, Vonage made 4 cents per share. In the quarter ending June 30 and yet to be reported, the company is expected to make 8 cents per share. For the full year, the estimate is for a profit of 35 cents per share, then growing to 41 cents per share in 2012.
You can buy that 17% growth for just 12 times 2011 expected earnings. That’s a bargain.
Sirius XM Radio
One monster market served by one company and one company only is in the satellite radio space. Sirius XM Radio (NASDAQ:SIRI) is a monopoly that can exert pricing power as it flexes its muscles against an inferior terrestrial radio product. A hot-button stock for years, Sirius XM has a market cap of just under $9 billion.
A near brush with bankruptcy related to intense competition between the two former rivals, XM and Sirius, almost destroyed shareholder value. Now united, the company is sitting around $2.20 per share and is poised to accelerate profit growth. Ultimately, Sirius’ subscriber base will surpass the numbers of those listening to terrestrial radio. It is that monster growth that makes this sub-$5 stock attractive today.
As time goes by, look for Sirius to raise prices and grow advertising revenue. Who or what can get in its way? The negatives will state that free options and MP3 devices easily rigged to automobiles will steal Sirius’ thunder. I disagree – and I would buy this stock at these prices.
Level 3 Communications
Another inexpensive stock with a big market cap is Level 3 Communications (NASDAQ:LVLT). The company is worth an approximate $4 billion, according to the market, and shares trade for just $2.35. If Google traded at that price, think about how fast the stock would appreciate – especially when the company delivers solid earnings performance that beats analyst estimates.
The same potential exists for Level 3. Last quarter, the company lost more money than expected. The reaction by the market was to send shares higher. Level 3 has more than doubled in value in 2011, with more gains likely to come for the remainder of the year.