Many traders hunt down cheap stocks to buy simply because low prices conjure up images of a bargain buy — and big profits if only a dollar or two gets added to the stock price.
However, it’s simply untrue that cheap stocks will go up faster than a high-priced company. The best cheap stocks to buy are actually good investments at any price — the low share price is just a sweetener if you’re into that kind of thing.
The bottom line is that a stock’s price is a reflection of the underlying business — whether they are shares that trade for more than $100 or just cheap stocks trading at a couple bucks per share. And while the math can vary widely based on the amount of shares outstanding and the total profits put up, it’s universally true that a stock goes up when investors are optimistic and goes down when investors are pessimistic.
Many cheap stocks are bad investments because they are battered for good reason. Take, for instance, RadioShack (RSH). The company has serious liquidity issues and is seriously being talked about as a bankruptcy candidate if it can’t turn things around quickly — which clearly means this is not the best cheap stock to buy.
On the other hand, if you do the research and look at fundamentals first, there are ways of finding cheap stocks to buy that are not just a crap shoot — and that stand an honest chance of appreciating over time.
Here are 11 such cheap stocks to buy that I have my eye on right now:
Cheap Stocks to Buy Now: Groupon (GRPN)
Sector: Internet Retail
Market Cap: $4.4 billion
YTD Performance: -45%
Let’s start here: I personally own shares of Groupon (GRPN) stock, so I am biased on this particular company as one of the best cheap stocks to buy now.
But let me explain why I bought shares about a month ago at around $6.50, and you can judge for yourself:
Groupon fell off a cliff to start 2014, before bouncing around at $6 or so for most of the summer. However, this negativity has largely been priced in and has knocked GRPN shares to a forward P/E of about 33 for this stock — and by the way, GRPN has beaten profit forecasts four quarters in row.
A shift to selling actual products via its Groupon Goods arm is a big driver of improvement in revenue and profits, and that shift could continue to pay off long term. Bigger-picture, Groupon has about $870 million in cash in the bank — roughly 20% of its entire market value — and zero debt.
Groupon recently was upgraded to “sector perform” at RBC, which might sound uninspiring but is an important development after flopping from previous highs.
All in all, I think Groupon is well-capitalized and profitable, and its shares trade at a fair value. When it comes to cheap stocks to buy now under $10, this pick is a the top of my list.
Again, in full disclosure I am long GRPN stock, so please do your own research here and don’t just take one shareholder’s word for it.
Cheap Stocks to Buy Now: Plug Power (PLUG)
Sector: Alternative Energy
Market Cap: $740 million
YTD Performance: +175%
Now, I’ll admit that the cult sensation of Plug Power (PLUG) was very overdone when shares peaked over $10 in March. But now shares are soundly under $5, the volatility has let up and it’s once again one of the best cheap stocks to buy now.
Plug Power nearly ran at breakeven in Q2 thanks to a big bump in revenue. The fuel cell company also saw an upgrade from Cowen & Co. as a result and got a liquidity boost when NRG Energy (NRG) plowed $35 million into shares and offered another $40 million credit line to help the company grow.
Admittedly, the numbers are still small as PLUG shipped less than 700 fuel cells in Q2.
But if you believe the narrative of alternative energy and the big potential of fuel cells, then Plug Power might be worth a flier in your portfolio.
Just remember that this is a bit of a cult name that has high volume and high volatility. Protect yourself with stop-losses and make sure you do your research regularly to trade on the latest news.
Cheap Stocks to Buy Now: Orexigen Therapeutics (OREX)
Market Cap: $550 million
YTD Performance: -20%
If you’re going to chase cheap stocks to buy now, biotech companies are often a high-risk but high-reward option.
Orexigen Therapeutics (OREX) is your typical money-losing development-phase drug company, banking on FDA approval as a pipeline to big sales — and perhaps a big buyout from larger pharmaceutical companies down the road.
Orexigen is particularly interesting because of a group of obesity medications it is currently pushing through trials, and its recently approved Contrave drug. This is a big potential market given the epidemic of obesity in America and increasingly in Latin America. Also the FDA has endured some criticism as of late for dragging its feet on obesity drug trials and approval in recent years despite the importance of helping the millions of patients out there.
OREX was recently selected as a top biotech pick by Credit Suisse, with an “outperform” rating and price target of $10 per share. That would be more than 100% upside if that comes to pass — and long term, the target could be even higher if its line of obesity medication gets widespread acceptance.
Just be careful — biotechs are always volatile, and OREX is no exception. I strongly advise using stop-losses on this fast-moving small-cap stock.
Cheap Stocks to Buy Now: Huntington Bank (HBAN)
Market Cap: $8.1 million
YTD Performance: +2%
I recommended Huntington Bancshares (HBAN) as one of the best cheap stocks to buy in June, and since then the stock has moved up about 5%. But if you hurry, you can still get in to Huntington for less than $10 a share.
HBAN stock has lagged the market so far in 2014, but has big upside in 2015 as the economy mends and lending picks up. Furthermore, hopes of an interest-rate hike by the Federal Reserve will increase the spread on lending — and thus profits for banks like Huntington.
A bank with operations mainly in the Midwest, from Michigan to West Virginia, this cyclical financial play could be a great way to gain exposure to the long-term recovery taking shape across America. Huntington also 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.
Its October earnings report for Q3 will be an important indicator of future health, but you might want to buy beforehand lest the numbers push HBAN above $10 a share.
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.
Cheap Stocks to Buy Now: Hercules Offshore (HERO)
Sector: Oil & Gas Services
Market Cap: $390 million
YTD Performance: -65%
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.
As a result, small service stocks like Hercules Offshore (HERO) have really taken it on the chin. The stock has imploded 65% so far in 2014.
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.
HERO has a bright future — so the only question is whether it will be able to weather the current hostile environment. I say it can, what with $191 million in cash on the books at the end of June — about half its total market capitalization — and $2.3 billion in assets over just $1.2 billion in debt.
The company is struggling, yes, but it’s not at risk of collapse. HERO divested a number of barge-based rigs in 2013, restructuring and cutting costs. As a result, Hercules has posted a profit in the past five quarters — with modest revenue growth to boot.
A patient investor who’s willing to wait on a return to drilling and higher oil prices over the long term could be well-served by a bargain buy in this energy stock.
Yes, even the oil majors have underperformed for some time. But no sector stays on top forever, and a diverse portfolio that includes exposure to energy is an important way to protect yourself in the long run. HERO is one of the best cheap stocks to buy now.
Cheap Stocks to Buy Now: Glu Mobile (GLUU)
Sector: Media & Video Games
Market Cap: $527 million
YTD Performance: +41%
Now let’s get one thing straight: These gaming companies like Zynga (ZNGA) and King (KING) are fad stocks that live and die based on the hottest mobile games. Once those games lose popularity, the stocks can tank — and the future is anything but guaranteed.
That said, Glu Mobile (GLUU) has made some promising steps with its product pipeline and is on many investors’ hot list for the dominant mobile video game company of the moment. Some are predicting Q3 revenue could beat expectations handily — possibly doubling forecasts — and a target well into the double-digits is attainable if the chips fall right.
Remember though, the mobile video game space is a fickle market. Right now Glu Mobile has seen big success with a Kim Kardashian-themed game that has been downloaded like mad by teens and young adults, but clearly it will need a second act to keep this up.
If you do buy GLUU, look for a swing trade here — not a buy-and-hold investment that will serve you for a decade.
Cheap Stocks to Buy Now: Semiconductor Manufacturing International (SMI)
Market Cap: $3.5 billion
YTD Performance: +32%
Semiconductor Manufacturing International (SMI) is exactly what it sounds like: a semiconductor manufacturer that serves international customers.
It’s based in China, which makes it a bit more risky, but being close to many Asian electronics manufacturers in China, Taiwan and Korea is actually a pretty good thing. Of particular interest is the fact that many of SMI’s clients aren’t sexy mobile companies like Apple (AAPL) that have ambitious smartphone or tablet plans, but simply electronics companies looking for a bit of computing power in appliances or conventional PCs.
SMI 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.
It’s not an exciting business in the least, but its returns are pretty good with more than 30% gains year-to-date in 2014, 40%-plus gains in the past 12 months and 180% returns during the past two years.
If we continue to see strong demand for electronics and growth from Asian electronics companies, SMI could continue to chug higher.
Just make sure you place a limit order if you want to buy shares, or buy a few times in smaller lots. This China stock trades only about 100,000 shares on a given day, so a market order could cause shares to spike — and make you pay a premium as a result.
Cheap Stocks to Buy Now: BlackRock Kelso (BKCC)
Market Cap: $650 million
YTD Performance: -6%
But remember, BKCC stock does continue to boast a massive 9.6% dividend yield based on its last payout of 21 cents per share quarterly. So share price appreciation isn’t necessarily the name of the game here.
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.
While the volatility isn’t great, it’s worth noting that short interest has been broadly declining — so there’s a good chance that the worst could be over, and that you’re buying at a bargain price in this cheap stock.
BKCC is one of the best cheap stocks to buy now.
Cheap Stocks to Buy Now: Cemig (CIG)
Market Cap: $7.9 billion
YTD Performance: +5%
Utility stocks underperformed as the market went “risk on” in 2013. At the same time, emerging markets have taken a beating thanks to a slowdown in Latin America and China.
So why would you stick your neck out for Cemig (CIG), a South American utility that has been quite challenged as of late?
Simple: Because things will turn around eventually — and when they do, Cemig will soar.
Cemig is a great opportunity to play growth in Brazil in a low-risk way — because after residential customers and businesses get on the electric grid, they tend to stay on it. Additionally, CIG stock yields a dividend of about 8% based on its last two payouts.
Admittedly, growth is choppy and distributions are volatile. But getting a juicy dividend will help ease the pain if Cemig stock goes nowhere even as U.S. stocks chug higher — and best of all, you’ll have a good footprint in emerging markets for the inevitable change in sentiment. But the current dividend is about 12% based on the last year of payouts.
While shares have dipped now that the semi-annual dividends are behind us, they could pick up again in late 2014 or early 2015 in anticipation of the next midyear distribution.
Unless you think South American stocks will never bounce back, it’s time to start considering a bargain buy in the region while valuations are so depressed. Cemig is a good, low-risk way to increase your exposure there without as much volatility as higher-growth emerging market stocks.
Cheap Stocks to Buy Now: AK Steel (AKS)
Market Cap: $1.5 billion
YTD Performance: +4%
AK Steel (AKS) is a boring materials stock that does just what you think it does — it produces steel, for use in industrial and electrical applications.
Commodity stocks have 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 lose money in fiscal 2014, but return to a decent profit in 2015 as a result.
Investors are starting to see the value here, since despite more than doubling since a year ago AKS stock still trades for just 6.5 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.
Cheap Stocks to Buy Now: Great Lakes Dredge & Dock (GLDD)
Market Cap: $400 million
YTD Performance: -30%
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 the beginning of 2012, the stock has improved 15% while the S&P 500 is up about 60%. Furthermore, GLDD canceled its dividend in 2012 and burned a lot of long-time investors.
Last year the stock saw big 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 GLDD stock since April as a result.
However, the company is indeed profitable after a clean Q2 earnings report, and its revenue grew quarter-over-quarter to boot. While it’s trading for a pretty fair 14.6 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.
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 was long GRPN. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.