You get what you pay for — It’s a time-tested truism applying not only to everyday consumerism, but to investing as well. Buying cheap stocks simply on the basis of their depressed price points typically leads to disaster. As conventional wisdom goes, cheap stocks are cheap for a reason.
Nevertheless, the allure of cheap stocks continue to pique the interest of even the most level-headed investors. After all, capital gains are admittedly limited in this environment of frustrating consolidation. Year-to-date, the Dow Jones Industrial Average has lost 8%, while the broader markets are down about 10%.
With such dismal returns, who wouldn’t want to try a deep pass into the end zone?
Thus, the key to success with cheap stocks isn’t necessarily abstinence, but smart risk-management. From a fundamental point of view, we are looking for some signs of strength amid the storm, either within a company’s financials or bullish developments in their given industry. Technically, cheap stocks should exhibit patterns that suggest a renewal of optimism, such as increasing volume or a rising trend channel.
Of course, cheap stocks are inherently volatile and no strategy can completely eliminate that risk. Still, arming yourself with a cohesive plan can greatly improve your odds.
Cheap Stocks Under $3: Empresas ICA (ICA)
Year-to-date, ICA stock has lost more than 60% of equity value; which, despite that dramatic hammering, pales in comparison to the 97% free fall company shares have experienced since its initial public offering back in April of 1992. This easily makes it one of the worst among the cheap stocks still lingering in the New York Stock Exchange.
Despite these towering troubles, ICA stock is an intriguing case study of forward-looking investors taking a gamble on potentially supportive fundamentals.
On a broad scale, the Dow Jones Mexico Index, while not in positive territory on a YTD-basis, has weathered the recent global correction far better than the domestic indices — down 3% versus a 9% loss for the S&P 500.
More directly applicable to ICA stock, the Mexican government declared two-and-a-half weeks ago that proposed aggressive spending cuts would be mitigated. The news launched ICA stock more than 15%, as the company generates most of its income through government projects.
So, any one of the cheap stocks littering the markets can have a good day. What sets ICA stock apart is that it has been able to build off of the positive momentum from the favorable tailwind.
Since the Sept. 9 announcement, ICA stock tacked on another 18% of equity value, and in the process, has formed what could be a bullish trend channel. If the trajectory holds, it would mean that the very recent September 4 session was the bottom.
Of course, it’s too early to tell whether the fundamentals will hold true, with Mexico not necessarily having the best reputation for stability. Still, the rewards for ICA stock can be massive if investors want to jump ahead of the wave.
Cheap Stocks Under $3: Oculus Innovative Sciences (OCLS)
Unfortunately for those early investors, OCLS stock’s prominence quickly faded — first with the onset of the Great Recession, and then through a series of unexpected competitive challenges. All in all, OCLS stock is down 97% from its introduction in the markets.
Oculus’ management team has assumed a fair share of the blame. Jim Schutz, chief executive officer of the embattled pharmaceutical company, tacitly stated that they “were a mile wide and an inch deep,” a reference to Oculus’ unfocused industry penetration strategy and poor business dealings that left them susceptible to being undercut by former partners turned competitors.
Recognizing the need for change, Oculus shifted their focus to the dermatology market, recruiting an experienced sales team to help drive brand awareness and to hopefully regain investor trust for OCLS stock.
So far, the results appear promising. Top-line sales have generally increased over the past four quarters, and business expenses have been kept from spiraling out of control. More pertinent to investors, OCLS stock has witnessed a mini-resurrection since May 26 of this year until Sept. 25, jumping nearly 70%.
Because of the massive rally, OCLS stock has managed to close the gap from a loss of 40% to a 9% loss YTD. This metric makes Oculus one of the better-performing companies among the cheap stocks discount bin.
Certainly, the volatility of the pharmaceutical markets and Oculus’ own history of wild trading is not suitable for everyone. Still, the markets are responding favorably to OCLS stock, and it could turn out to be one of this year’s shockers.
Cheap Stocks Under $3: New Gold Inc. (NGD)
NGD stock is down nearly 50% YTD — a victim of broadly spiraling gold prices that once saw a record high of $1,900 back in 2011, but have since fallen well below the $1,200 level.
With the underlying asset so deeply depressed, New Gold has found it increasingly difficult to combat squeezing margins. In the last two years, NGD stock has posted a worrisome trend of declining earnings performance, and its most recent result for the second quarter of fiscal year 2015 was especially dire — NGD stock’s earnings dropped 33% compared to Q2 FY2014. Adding insult to injury, the YOY return for NGD stock is 59% in the red.
Given the poor prospects for the mining company, why would anyone want to consider an investment in NGD stock?
Namely, a recovery in gold prices, which, despite choppy waters, has been trending positively over the past two months. Since Aug. 5, gold has carved up a 6% move — nothing earth shattering, to be sure, but it is in utter defiance of bearish prognostications calling for three-digit gold prices.
Should recent bullishness hold true, this could spell a brighter future for NGD stock, which has already jumped nearly 20% in less than 60 days.
Because of the inherent volatility in commodity markets, there is a case to be made that NGD stock could be among the most speculative of cheap stocks. Nonetheless, the opportunity to make exponential profits is a realistic possibility.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.