The best cheap stocks to buy now are often smaller companies you haven’t heard of, or occasionally bigger names that have fallen on hard times and are hoping to get back on top.
I tend to not chase cheap stocks because I follow Warren Buffett’s advice of finding stocks you can hold “forever,” or stocks that are so secure they could be run by an idiot and not fall off the rails. But not a week goes by where investors don’t tweet me or email with questions about the best cheap stocks to buy now, and a large segment of the investing public is very concerned with not paying more than a few dollars for a single share of stock.
I believe cheap stocks or penny stocks should be a very small part of your portfolio, but if you’re one of those aggressive traders looking for the best cheap stocks to buy now, I’d prefer you look at this list instead of just chasing the bargain picks out there that are doomed to go to zero.
So disclaimers aside: Here are the nine best cheap stocks to buy for 2015, in my opinion:
1-Year Returns: +95% vs. 12% for the S&P 500
AU Optronics Corp (ADR) (NASDAQ:AUO) is a familiar name among those who have followed my previous recommendations of the best cheap stocks to buy. I highlighted this Taiwan-based tech company in November, calling it “nicely in between a risky small-cap and a sleepy blue chip” — and since then, the stock is up 11%.
AU Optronics manufacturers LCD displays for all manner of electronics, from TVs to mobile phones to GPS devices, and is seeing brisk business as both consumer and business IT spending stay strong. And while AU Optronics is a mid-cap stock, its geographic proximity to bigger electronics companies in Asia means AUO stock is in the right place to capitalize on continued sales growth and new contracts.
Admittedly, AU Optronics had been running at a loss over the past few years and only recently returned to profitability. But it’s now back on track, and investors are enthusiastic about the future of the company.
If you’re looking for a cheap stock with the wind at its back, this doubler has strong momentum in 2015 and could push even higher in the months ahead.
1-Year Returns: +95%
Skilled Healthcare Group, Inc. (NYSE:SKH) operates skilled nursing sites, hospices and assisted living facilities across the U.S. Among the best cheap stocks to buy now, SKH is a perfect mix of explosive growth potential with long-term stability thanks to its focus on aging baby boomer population that will deliver more and more “customers” to SKH in the years ahead.
For starters, let’s look at what’s lifting SKH right now. The stock has nearly doubled in the past year thanks to more efficient operations and projections for future earnings growth. After missing expectations to start the year, for instance, Skilled Healthcare Group managed to trounce earnings expectations last quarter with a massive 85% earnings beat. Even better is that the upcoming quarterly report in February should show earnings growth that is nearly double year-over-year.
The current outlook is strong, but of big interest to me is the long-term potential from its skilled nursing and hospice businesses that will continue to assist the aging senior population of the U.S. in the years ahead.
There are few certainties on Wall Street, but the demographic push of again boomers is one of them — old age means a need for more healthcare, and companies like SKH will be in great shape as a result.
Sector: Business Services
1-Year Returns: +70%
From senior care, we pivot to an interesting twist on healthcare stocks via Merge Healthcare Inc. (NASDAQ:MRGE). Unlike the last stock mentioned in our list of the best cheap stocks to buy now, MRGE doesn’t actually provide any care itself. Rather, Merge Healthcare is a third party that’s focused on business services to the primary care providers.
So what does this cheap stock do? The simplest way to explain is that it provides a high-tech way for healthcare professionals to store, share and review medical images. Anyone who has been to a specialist in the last few years knows that medical imaging has come a long way and is a big part of many diagnoses and procedures — and that means a big demand for companies like Merge to store those images securely and help doctors access and review the images they need.
It’s a niche business, to be sure, but MRGE is at the cutting edge of digital medical imaging and has grown to the point that it’s finally starting to operate at breakeven. Even better, the company has expectations of substantial profitability this year and next.
For investors looking to get in on the ground floor of modern medicine with this high-tech play on healthcare imaging, don’t delay. MRGE stock is up almost 70% in the last year and won’t stay a cheap stock for long.
Sector: Retail Stores
1-Year Returns: +52%
I know, I know — why in the world would anyone consider big-box retail store Office Depot Inc (NASDAQ:ODP) as one of the best cheap stocks to buy now? After all, aren’t these old-school specialty retailers like ODP cheap because they are doomed?
Well, it’s undeniable that Office Depot faces some serious headwinds in the age of e-commerce and Amazon.com, Inc. (NASDAQ:AMZN). But keep in mind that good investments right now don’t necessarily have to be investments that will always succeed, or even companies that will be around five or 10 years down the road.
The reason I like ODP as one of the best cheap stocks to buy now is simple: The buyout chatter surrounding it and the nearly inevitable acquisition offer from larger rival Staples (NASDAQ:SPLS) has resulted in a lot of interest on Wall Street. Consider that the stock is up more than 50% in the last 12 months!
Thanks to efficiencies from its own merger with OfficeMax, Office Depot has managed to stop the bleeding and return to profitability on its own. That makes it a much more attractive target for Staples, and also guarantees that investors won’t be caught holding the bag if a deal doesn’t happen immediately.
But make no mistake, a deal is almost certain to happen — and now that ODP has rolled back slightly from its 52-week high around $9, it’s a perfect opportunity to buy into this cheap stock before the feeding frenzy begins anew.
1-Year Returns: -10%
Hugoton Royalty Trust (NYSE:HGT) has had a rough year, losing 10% while the market is up nicely in the last 12 months. However, if you’re looking for an inexpensive play that also is a dividend machine, this company is among the best cheap stocks to buy now.
As a so-called “royalty trust” or “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 (NYSE:XOM). As that natural gas is extracted and sold, you as a member of the trust get a portion of the profits.
Because of all the negativity around energy prices, HGT has been on the outs with investors. But it’s important to note that only a small fraction of its operations address crude oil and the vast majority is related to natural gas. And while natural gas prices have been hurt alongside crude, the damage has not been as severe.
Besides, investors in a royalty trust like HGT aren’t after swing trades based on commodity prices. After all, there’s no growth in an operation like this — just a regular stream of monthly dividends as the energy is sold off slowly.
In fact, that’s what makes HGT so attractive. Consider that it has paid $1.08 in dividends over the last 12 months — good for a yield of about 14% at current pricing! Even if you don’t want to take the full calendar year and simply annualize the lowest monthly payment of 4 cents, that still equals 48 cents in full — good for a yield of more than 6% at current prices.
You simply can’t find that income potential in other cheap stocks out there.
The supplies backing up Hugoton are ample, too, with over 200 billion cubic feet of natural gas reserves as of the company’s last annual report.
1-Year Returns: +40%
CNinsure Inc. (ADR) (NASDAQ:CISG) is an independent insurance company in China that mainly deals with property and life insurance policies. It’s only about $400 million in market cap, but is substantial in size with nearly 500 sales and service locations serving 27 provinces.
Insurance isn’t sexy, but it continues to be a powerful growth industry in China — both as poorer residents enter the middle class and start to think about things like life insurance, but also because the risk-averse nature of many looking for a way to provide for their families in a nation that has nothing even close to Social Security as a social safety net.
Now, CNinsure is a much smaller player than the big guys such as China Life Insurance Company Ltd. (ADR) (NYSE:LFC), which boasts a $150billion market capitalization. But being small and agile means incredible upside potential, as well as the chance of a big-ticket buyout through an acquisition.
Sure, China stocks have been very high risk, but CNinsure is one of the few emerging-market stocks that has outperformed in the last year. Moreover, CISG stock is soundly profitable and continues to see its revenue march higher. You may want to give this China stock a look as one of the best cheap stocks to buy now for growth in 2015.
1-Year Returns: Flat
Chimera Investment Corporation (NYSE:CIM) is a mortgage-focused REIT that owns real estate debt, not property. This sounds a bit risky given the role mortgage-backed securities played in the financial crisis, but aggressive investors could see big upside in CIM stock if they buy at current levels.
That’s because right now, Chimera stock trades below its book value by a small amount. Bears will point out that’s for good reason, with the uncertainty surrounding the value of some mortgage paper justifying a lower valuation in the eyes of investors. But I think Wall Street is being unfairly pessimistic about CIM stock and its books.
Additionally, as Larry Meyers recently pointed out in an article highlighting the potential upside in this cheap stock, there’s a juicy 11.3% dividend at current pricing based on payouts of 9 cents per quarter. CIM stock pays 9 cents per quarter. And with fiscal 2015 earnings set to come in at 46 cents a share, that is about 78% of earnings, making payouts very sustainable.
There are always risks in the market, particularly with financial stocks whose only value is based on loans and other “paper” assets. But considering the big-time dividend and the recent stability in shares, I wouldn’t be afraid of a stake in CIM stock at these levels.
Sector: Alternative Energy
1-Year Returns: -13%
Plug Power Inc (NASDAQ:PLUG) had burned many investors last year, and while it’s been reasonably stable lately, PLUG admittedly still is down big from its peak of more than $10 a share back in March. However, this volatile but disruptive company could be one of your best cheap stocks to buy in 2015.
Part of the reason for a big drop-off is that the company still is struggling to break even, and on top of that had the unfortunate news recently that it won’t hit its previous 2015 sales targets and had to reduce forward guidance.
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. While margins have gotten better, revenue has remained challenged over the past few years, and PLUG needs to keep up its sales growth to get ahead.
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.
1-Year Returns: -24%
No list of cheap stocks to buy would be complete with out a biotechnology play that’s boom or bust based on its drug approval. One that I’ve been watching and will continue to show interest in is Orexigen Therapeutics, Inc. (NASDAQ:OREX).
Orexigen is a typical development-phase biotech that’s losing money as it researches its cures, banking on both FDA approval and success in the doctor’s office that will generate great sales down the road. Those sales will cause a big windfall in profits when they come — if they come — and may even spark acquisition interest from Big Pharma.
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 the rest of the world. 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.
Back in September, OREX was selected as a top biotech pick by Credit Suisse, with an “outperform” rating and price target of $10 per share. And lest you think that’s old news, just a few weeks ago RBC Capital markets also rated Orexigen “outperform” with that same $10 target.
If you can’t do math, that would be about 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. The good news is that this cheap stock is very liquid, with average volume well into the millions of shares traded daily, but that doesn’t mean you won’t face big swings both ways in share price.
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 email@example.com or follow him on Twitter via @JeffReevesIP.