The good thing about a market downturn is that cheap stocks are plentiful thanks to plummeting stock prices. But how do you separate the best cheap stocks to buy now from the bad companies that have been declining for good reason?
It starts with an objective look at the market at large, and the understanding that share price alone is only one factor. Even if you only have a small amount of cash and feel cheap stocks are your best bet, you shouldn’t simply screen for the lowest prices on Wall Street and then buy those names.
Instead you need to consider whether the company pays a dividend, whether it’s trading at a deep discount to future earnings potential and whether or not the broader economic picture points to possible success.
There’s no way to know for certain which cheap stocks to buy now and which ones to ignore, so you should always do your own research. Additionally, it’s important to note that many cheap stocks are also smaller and more volatile names — so big swings should be expected, and these investments should not be the foundation of your portfolio.
But if you’re looking for the best cheap stocks to buy now, here are a few ideas all trading under $8 per share currently.
Best Cheap Stocks to Buy: Supervalu Inc. (SVU)
Price as of 1/25: ~$4.15
Supervalu Inc. (SVU) has not been immune to the market turmoil as of late, with negative sentiment overall coupling up with a poor earnings report to result in a massive 40% plunge over the last three months.
But the earnings report wasn’t as bad as investors made it out to be, and panic and short selling has now pushed this grocery store operator well below fair value. That makes SVU one of the best cheap stocks to buy now.
For starters, let’s talk earnings. Yes, its 16 cents in EPS was a double-digit decline over the previous year, but that figure was actually in line with estimates. The top line also declined slightly, less than 1%, So it’s not the end of the world. Furthermore, estimates put total FY2016 earnings at 72 cents per share — meaning SVU trades for a forward price-to-earnings ratio of less than 6 right now!
To top it off, Supervalu just filed to spin off its Save-A-Lot brand to rejuvenate operations and unlock shareholder value. Save-A-Lot is a low-priced retailer that is actually more akin to a Dollar Tree (DLTR) than a true grocery store, and it is a good idea to treat these businesses differently and manage them separately to maximize returns.
I won’t pretend that grocery stores are sexy or that there’s big growth here. But there is value in Supervalue given its current pricing and scale. The market is not fairly valuing this stock, and a peak in short interest shows that there may be big squeeze potential here now that it will take seven full days of trading to cover the shorts and their 19.5 million shares.
Best Cheap Stocks to Buy: Ambev SA (ADR) (ABEV)
Price as of 1/25: ~$4.10
Ambev SA (ADR) (ABEV) is a Brazilian beverage giant that makes beer and soft drinks for sale across South America. Obviously it hasn’t been a great time to be an investor in Brazil, with the popular iShares MSCI Brazil ETF (EWZ) off about 60% in the last year and the nation on pace to enter its worst recession in more than 100 years. But as a consumer staples play, there is a modicum of stability in Ambev — and as a victim of a flight from this emerging market, ABEV stock has been grossly oversold and is one of the best cheap stocks in the world at this moment.
Consider AmBev has a forward P/E of less than 16 right now, compared with 20 or so for other similar consumer staples plays like Coca-Cola (KO). Also, Ambev short interest soared from about 16 million shares at the end of the year to 23 million as of the most recent data — hinting at big short-squeeze potential when the dust settles.
And keep in mind, Thomson Reuters is tracking six analyst recommendations on the stock, and the lowest price target of any of them is almost 15% higher than current levels.
Heck, Ambev even pays a nice dividend of about 4% based on its last two quarterly payouts of 4 cents a share, which comes to a sustainable 64% of total profits.
This isn’t a slam dunk, but the low-risk nature of this staples play and the decent dividend make it one of the few cheap stocks to buy now that isn’t an overly aggressive call or a grab for a falling knife.
Best Cheap Stocks to Buy: Yamana Gold Inc. (USA) (AUY)
Price as of 1/25: ~$1.55
Yamana Gold Inc. (USA) (AUY) is a gold miner that has lost some of its luster in the last two years as precious metal prices have headed south. However, Yamana is one of the best stocks to buy right now as investors look to the safety of gold instead of equities — and thanks to a great job at reducing operational and capital costs as gold has slumped, it remains well-positioned to profit now that it is right-sized for the current environment.
After hovering on the edge of profitability for 2015, Yamana is hoping to get out of the red in 2016. That all depends on the movement of precious metal prices; however, a 5% rally for gold since the beginning of December bodes well for AUY and its shareholders.
And keep in mind, the company pays a nice 4% dividend too. But since this is one of those cheap stocks that we all love, it doesn’t take a lot of payout to get that yield — just 1.5 cents quarterly – and it will take only a slim amount of profits to cover that payout and allow for increases down the road.
Gold prices may flatline or even fall further, sure. But given the negativity in the stock market and the negativity also baked into Yamana Gold, it’s unlikely this cheap stock will see much more pressure in 2016.
Volatility is to be expected, such as when shares went from $1.50 in September to $2.50 in October, then back down to $1.80 by November … so be prepared to pull the trigger quickly if you buy in.
Best Cheap Stocks to Buy: Renren Inc (RENN)
Price as of 1/25: ~$3.25
I know, at first blush, Renren Inc (RENN) is tailor-made for misery.
It’s a Chinese stock, for one. That’s enough to give anyone the willies these days.
It’s also a once-sexy social media name that has been written off as a fad. Touted as China’s Facebook (FB), RENN pulled off a successful 2011 IPO only to crash and burn some 80% from its peak in those early days of trading.
But there are signs of life at Renren. Yes, the company has seen revenue declines and is operating at a loss. However, the company has a 25% stake in SoFi — a U.S. based “fintech” firm that operates as a marketplace for refinancing student loans and mortgages. SoFi just raised $1 billion in private funding, and is rumored to be looking at an IPO.
While the market is choppy, estimates last fall put the valuation of SoFi at some $1.5 billion to $2 billion and rising – meaning $500 million of the current $750 million or so valuation of Renren is accounted for in SoFi alone.
Sure, Renren is troubled, but we’ve been down this road before with Yahoo (YHOO) and Alibaba (BABA). The core business of Yahoo was bad — and, indeed still is — but Yahoo’s commensurate pop based on its stake in the Asian Internet giant resulted in shares of YHOO roughly doubling in 2013.
SoFi may not be as sexy as Alibaba, and cheap stocks in China are naturally high-risk. But the math tends to add up for RENN stock right now.
Best Cheap Stocks to Buy: Ruby Tuesday, Inc. (RT)
Price as of 1/25: ~$5.50
Ruby Tuesday, Inc. (RT) is one of those in-between restaurants that has been pinched by the “fast casual” craze of the last decade or so. While the menu is decent and the bar is always stocked, folks tend to either go upscale to something a bit nicer or downscale to the cheap and easy alternatives like Chipotle (CMG) or Panera (PNRA).
But this risk aside, there are reasons to like RT stock right now between $5 and $6 per share.
The forward P/E of this restaurant stock is less than 10, and furthermore earnings are actually on pace to grow by roughly 50% from 11 cents a share to 18 next fiscal year as revenue holds steady.
Yes, the company did just report a loss a week or so ago, but it was narrower than expected and same-store sales actually were up 0.8% for the second consecutive quarter of modest growth.
Doing more with less isn’t necessarily a multiyear plan for success, but it can result in a nice swing trade for those looking at cheap stocks that are distressed right now — and trading at bargain levels.
And added bonus is that Ruby Tuesday is almost wholly American with its 730 locations. That keeps RT insulated from the pain of a strong dollar that is taking a bite out of earnings for multinational restaurant chains such as McDonald’s (MCD) and Yum Brands (YUM).
American consumers look strong as the job market mends and gas prices remain low, so I think there’s reason to be optimistic in RT stock for the rest of 2016 given the attractive valuation and the success that management has had keeping costs down to power earnings growth.
Best Cheap Stocks to Buy: Sirius XM Holdings Inc. (SIRI)
Price as of 1/25: ~$3.70
Satellite radio provider Sirius XM Holdings Inc. (SIRI) always seems to make these lists of the best cheap stocks to buy, since it has been trading in the single digits for many years. But an objective look at SIRI shows that the stock isn’t just likable because of its cult status or previous performance.
This summer, SIRI put up strong earnings that show it’s a pretty good bet regardless of what the nominal share price is — including a record level of subscribers. The company followed that up with impressive Q3 numbers in October, fueled by more than $550 million in buybacks to lift earnings.
That bodes well for Q4 numbers in the first week of February, which could be a catalyst to send this cheap stock higher.
Another five-year deal for anchor Howard Stern also lends a bit of stability to the stock now that it’s operating consistently in the black.
As one of the highest-profile cheap stocks on Wall Street, expect sentiment to oscillate and volatility to reign for Sirius XM regardless of the headlines or the market environment. But over time, SIRI stock should certainly be trending higher based on the recent history of strong earnings reports.
Best Cheap Stocks to Buy: Vonage Holdings Corp. (VG)
Price as of 1/25: ~$5.05
Vonage Holdings Corp. (VG) is that quirky company that allows cheap phone calls to be made over your internet connection — a great idea, but one that has never managed to attain critical mass despite the digital age we live in.
But that could change in 2016.
CEO Alan Maserek joined the company a little over a year ago from Alphabet (GOOG, GOOGL), or what was still Google back then. His previous company QuickOffice was acquired by Google/Alphabet/whatever, so that in itself is a great sign Vonage could be an acquisition target.
Furthermore, VG is not a fad but a viable business that is posting consistent profits. Plus, it’s only trading for about 16 times forward profits and continues to grow modestly year-over-year. Even if it’s not acquired, then, this is one of the best cheap stocks out there simply by virtue of operating in the black and growing steadily over time instead of being just a speculative small cap running on hope alone.
Furthermore, Vonage has made a wide strategic decision to move beyond consumer-focused marketing and is committing nearly its entire operation to enterprise contracts for the corporate space. This is incredibly wise because many consumers may not have the technical understanding or the high-speed Internet connection necessary for Vonage … while plenty of small businesses do.
That approach is paying off, too, with business revenue soaring 134% year-over-year in Vonage’s November earnings report. A similar showing could spark a move higher in February when this cheap stock reports next.
Best Cheap Stocks to Buy: ICICI Bank Ltd (ADR) (IBN)
Price as of 1/25: ~$7.00
ICICI Bank Ltd (ADR) (IBN) may be the most aggressive of the cheap stocks on this list, because it is a bank in India that faces serious uncertainty in 2016.
However, it also could offer the biggest potential rewards.
On the plus side, India is hoping for a 9% growth rate in GDP — the fastest in the world, and a simply amazing figure giving the slowdown in China and troubles elsewhere around the globe. As one of the largest banks in the region, ICICI will naturally benefit if that growth spurs consumer and business lending.
However, the high hopes of 2015 ran into a snag thanks to commodity pressures and a particularly troublesome monsoon season … and after IBN stock had been pricing in that success, doubling from about $6 in early 2014 to almost $13 at the start of 2015, it has once again been beaten down to the $6 range as high expectations weren’t met.
Volatility is the norm in emerging markets, and India is no different. Playing a cyclical stock like ICICI means that you live and die by the broader economic picture, so investors need to be wary.
However, if India does turn out to be the only bright spot in the world and manages to approach that promised 9% growth rate … well, this may not only be one of the best cheap stocks to buy now, but one of the best stocks anywhere at any price.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.