Finding the best cheap stocks to buy now involves much more than just a simple search for share price.
After all, some of the stocks that trade for under $10 have gotten to be cheap for a reason. It’s crucial, then, to separate the toxic investments that have posted bad earnings or botched product launches from the best cheap stocks that offer real potential.
Some of the things investors should look for when selecting the best cheap stocks to buy now include:
- Profitability, or the potential for profitability in the short-term
- A focus on an industry where there is big opportunity in 2015
- A specific advantage over stocks that are their peers in that industry
It’s difficult to find all three factors in a single investment, but I think I have done just that in nine specific companies trading under $10 per share right now.
So what are these potential investments? Here they are — the best cheap stocks to buy now under $10 per share:
Best Cheap Stocks to Buy Now: Vertex Energy Inc (VTNR)
Vertex Energy Inc (VTNR) trades for less than $4 right now, and is the smallest player on this list of cheap stocks to buy with a market cap of just $90 million.
This makes Vertex very risky — and I must state up front that any investors should only consider buying into VRTX in aggressive portfolios, and should do so using limit orders instead of market orders to protect yourself from volatility.
If the size and risky nature doesn’t scare you off, here’s why I like Vertex: It’s focused on recycling industrial and commercial waste, processing products like used motor oil to create other fuels or chemicals. It’s a messy business, but a profitable one — and one that should only grow in coming years as the focus on green energy and environmental regulations increases.
And lest you think this is an unproven start-up, Vertex revenue has tripled since fiscal 2010, and the company is soundly profitable.
For long-term investors looking for cheap stocks to buy that could double or triple in 2015, Vertex Energy is a great candidate.
Best Cheap Stocks to Buy Now: Array Biopharma Inc (ARRY)
Array Biopharma Inc (ARRY) is the only biotechnology company you’ll find on this list, because most cheap stocks in this sector are just variations on the same theme — in short, they are development-stage companies that are burning cash as they try to create successful drugs.
Either they succeed and become profitable, eventually getting bought out by big pharma — or they go to zero as their treatments fail.
Array has promise of making it for a few reasons. First, its research focuses on small molecule drugs that are meant to fight cancer. Currently, seven Phase 3 or late-stage studies are in progress or near their start.
You can read up more on Array 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.
On the other hand, if the drugs work then it’s worth noting that ARRY stock has already partnered with AstraZeneca (AZN) and Novartis (NVS) on two drugs — and could be fast-tracked for acquisition in 2015.
This is indeed a risky stock and a volatile one — much like the best cheap biotech stock I named a few months ago via Northwest Biotherapeutics, Inc (NWBO) and Orexigen Therapeutics, Inc. (OREX) that I highlighted in November. But if you’re not afraid of the risk, ARRY and other cheap stocks like it could deliver big-time profits in a hurry next year.
Best Cheap Stocks to Buy Now: Shanda Games Limited (GAME)
So why would this Chinese software company be back on my list almost a year later despite overtures of an acquisition?
Well, because that buyout banter hasn’t come to much of anything despite a $1.9 billion proposal early in 2014. In fact, the consortium of companies that was looking to acquire Shanda previously seems to have fallen apart — and absurdly, a textile company now owns 24% of GAME stock and holds over 40% of voting rights! Meanwhile, the company has lost its CEO and has seen plenty of confusion about its long-term prospects amid this drama.
The result is that shares have continued to roll back from the buyout premium, with shares down more than 10% in the last month alone.
This presents a buying opportunity for investors, both because of the chance of an acquisition coming to pass anyway, and because without a buyout Shanda still has something to offer.
China is a huge market for gaming, particularly in the mobile video game space and the online role-playing game market in which Shanda specializes.
Revenue trends have been disappointing lately, but that’s to be expected given the boardroom drama at the company. A refocused and re-energized Shanda could see big growth in 2015 — or, more preferably, could simply find interest from a prospective buyer once more and see it recover what its lost in short order.
Best Cheap Stocks to Buy Now: Chegg Inc (CHGG)
Chegg Inc (CHGG) is a recently minted internet stock that only went public about a year ago. A “student learning platform,” Chegg is primarily a site that provides textbook rentals right now to help college-bound adults save some cash.
It’s a great idea, but the problem here is profitability. Chegg isn’t incredibly well-known, and has had trouble growing at a rate that Wall Street is looking for. Revenue should finish the year up about 20% to $304 million or so, but the company is still unprofitable and has “only” doubled in size since 2010 — not quite the sexy growth story that many internet stock investors are looking for.
However, the negativity around Chegg has most certainly been priced in with its recent pounding. Shares are down 20% this year and as a stock trading in the single digits, it won’t take much of a profit to finally achieve a decent earnings multiple.
Consider that it current trades at a forward profit-to-earnings ratio of about 45 — while other sexy names like Twitter Inc (TWTR) and Amazon.com. Inc. (AMZN) have underperformed but still boast earnings multiples that are twice that.
A few earnings surprises next year could put CHGG stock back in Wall Street’s good graces. And let’s not forget that as companies like Amazon continue to gobble up competitors, Chegg is well-positioned with its niche textbook service and would be an attractive e-commerce addition to an organization that can increase profitability through scale.
This is assuredly a risky play, like all cheap stocks, but there are reasons to be optimistic. The market opportunity here is enormous considering the average college student spends some $1,200 annually on textbooks — so someone is bound to figure out how to tap into this potential.
Chegg is the leader, and the most likely candidate.
Best Cheap Stocks to Buy Now: FormFactor, Inc. (FORM)
FormFactor, Inc. (FORM) is a semiconductor company that has posted strong gains in 2014 thanks to a better-than-expected environment. FormFactor is not your conventional chipmaker, but rather focuses on service applications for the industry, such as quality control and testing.
As business has been brisk for chipmakers based on better-than-expected PC demand and overall growth for the U.S. tech sector at large, FORM stock has seen a nice run. But beyond the short-term momentum, there are reasons to be optimistic that business trends will continue to be strong in 2015.
Consider positive earnings estimate revisions in anticipation of its Q3 report – and then strong results that topped even those higher expectations. Analysts have increased their optimism around FORM stock as a result, with Needham recently starting coverage at a “buy” rating with an $11 price target — almost 30% upside from here.
There is a risk of a slowdown to the semiconductor space if the global economy runs into a rough patch in 2015, but remember that the pessimism many saw for chipmakers in the last few years didn’t really result in any long-term pain for the sector.
And besides, without the big risk of R&D and mobile competition that is pressuring giants like Intel Corporation (INTC), FormFactor is a great way to play semiconductors without some of the risks to adapt and evolve with new products; FORM simply provides testing applications and that’s that.
If you are looking for the best cheap stocks to buy in Tech, FORM is a clear winner thanks to strong fundamentals and share price momentum right now.
Best Cheap Stocks to Buy Now: Hugoton Royalty Trust (HGT)
Hugoton Royalty Trust (HGT) is one of the best cheap stocks to buy at around $8 a share currently, but even income investors looking for low-risk, long-term plays should consider a look at this MLP.
Thanks to monthly distributions that have tallied over $1 in the last year, HGT yields over 13% based on the last 12 months of payouts! And even though the latest payday of just 6.6 cents is down from previous months, HGT yields a hefty 9.8% if you annualize the most recent dividend.
So what allows for the big-time dividends? Well, as a so-called “depletion trust,” HGT stock essentially is a supply of natural gas that is under the control of XTO Energy — the nat gas arm of energy king Exxon Mobil Corporation (XOM). As that natural gas is extracted and sold, you as a member of the trust get a portion of the profits.
That extraction and payout model means there’s little growth here, and that you’re just a partner in the cash generated by bringing energy to market. But if you’re looking for income in cheap stocks, there are fewer better options than HGT now.
Sure, natural gas pricing is soft. But double-digit return via dividends alone should be a good sweetener even if prices never move up.
And who knows, if the broader market hits a rough patch in 2015, it may be nice to have the reliable monthly income from HGT to keep your portfolio moving in the right direction.
Best Cheap Stocks to Buy Now: Plug Power Inc (PLUG)
Plug Power Inc (PLUG) took Wall Street by storm in spring of 2014, but has since been a bit of a disappointment.
Still, while PLUG stock is down considerably from its peak of over $10 a share back in March, the fuel cell company is still up about 100% since the first of the year — so there is a lot for investors to be happy about even considering the declines from earlier highs.
Yes, Plug Power took it on the chin after Q3 earnings disappointed and sent shares down by double-digits in short order. However, it’s important to remember that volatility is normal for early-stage companies like this — and that the previous quarter, PLUG stock earnings showed decent revenue growth and managed to post an adjusted profit, along with an infusion of cash from power generation company NRG Energy Inc (NRG).
There admittedly is a bunch of risk here, with a speculative fuel cell company like Plug Power riding mostly a wave of investor sentiment on not much fundamental improvement. Furthermore, the company is still unprofitable as it looks to build up its scale and efficiency.
But if you believe in fuel cell technology and sentiment stays strong, Plug Power Inc could be one of the best cheap stocks to buy now for gains in 2015 and beyond.
Best Cheap Stocks to Buy Now: Castle Brands Inc (ROX)
Castle Brands Inc (ROX) is an alcoholic beverages company behind brands that include Gosling’s Rum, Jefferson’s whiskeys and other spirits. Castle distributes its liquor in all 50 states, as well as 13 international markets.
As a “sin stock,” Castle Brands enjoys the stability of knowing that its products will always be in demand even should the economy take a turn for the worse. And beyond the stability of alcohol and liquor sales, the spirits industry is growing strong both at home and abroad thanks to increasing demand from markets, such as China.
Castle is riding that tailwind to big success. Revenue for the last fiscal year hit $48.1 million, up 17% from $41.2 million previously and up 60% from just $30 million two years ago. The company is plotting revenue of $54.4 million in the current fiscal year for another 13% growth on top of that.
The catch is that, unlike the big guys in the spirits business like Diageo plc (DEO), Castle Brands Inc. is not yet profitable. And even if revenue tops the $54.4 million expected this year, it certainly is a long way from the same scale as its major competitors.
Consider that Diageo whisky Johnnie Walker sells about 19 million cases by itself every year! That means even if you could buy a case for $3 — something that I, personally, wish was a possibility — this brand alone tops the entirety of Castle sales quite easily.
Still, ROX stock is liquid (pardon the pun) trading some 600,000 shares daily, so there’s not the same risk of volatility facing other companies on this list of the best cheap stocks to buy. Furthermore, if you believe in the long-term, secular growth of global liquor sales, there is perhaps no better way to make a profit in a hurry than Castle in 2015.
After all, this stock has nearly doubled in 2014 despite its small-time operations now. That says something about what Wall Street things about its potential.
Best Cheap Stocks to Buy Now: BlackRock Kelso Capital Corp. (BKCC)
BlackRock Kelso Capital Corp. (BKCC) is another income-producing option among the best cheap stocks to buy now. As a business development company, or BDC, BlackRock Kelso generates cash from investments in and loans to midsized companies. As that capital generates returns, BlackRock Kelso shares generate big dividends for shareholders.
Those dividends add up to a double-digit yield right now. Based on the last year of payouts, BKCC stock yields 10.8%. And while the most recent 21-cent payday for Q4 is a bit lower than the 26 cents to start the year, even if you simply annualize that payout you get a 10.2% yield instead.
Of course, share price performance hasn’t been ideal lately because BKCC lives and dies by its underlying investments — and in 2014, some of those investments haven’t done that great.
You can look into its full list of investments here for more detail. But in regards to 2015, it’s important to note that as of its Q3 earnings, BlackRock has made new investments of $122 million — and according to the most recent conference call, an additional $180 million-plus of new ventures since then that could turn that track record around in 2015.
There is a bit of interest-rate risk for BKCC, since the company funds some of its investments by borrowing money. That means net investment income is affected by the difference between investment returns and the interest rate on debt. However, despite the sell-off in shares in anticipation of an interest rate hike by the Federal Reserve, the reality is that rates have remained rock-bottom and show no signs of moving higher anytime soon.
In fact, some experts don’t expect an increase to the Fed funds rate until fall 2015.
That could mean a bargain buying opportunity in BKCC stock right now. Couple that with the idea of a recovering economy with more midsize companies look to expand, and BlackRock Kelso will benefit handsomely from its lending and investments.
With a 10% yield as a sweetener, BKCC is one of the best cheap stocks to buy for 2014.
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.