How many times have you seen the headline, “Stocks to Buy Under $10”? I’m betting a lot. Everyone loves a deal, which means investors spend a lot of time rifling through the bargain bin that is single-digit stock prices. Occasionally, we’re able to find a company whose stock has actually been mispriced. But that’s rare.
Others feel more at home buying stocks whose triple-digit prices project an air of success not found in lower-priced stocks. After all, you don’t get to $700 without doing a few things right in your business. It’s here where you have a more realistic chance of success.
But for those who really want to hit the big time, stocks selling between $10 and $20 is where you can generate some of the biggest returns over the long term. The best part is, many of these companies have excellent balance sheets and are still growing.
To qualify for consideration, a stock must: trade between $10 and $20; have a market cap of $1 billion or higher; show average daily volume of more than 500,000 shares; have total debt less than 20% of total assets, and most importantly, it must be exhibiting revenue growth of 10% or more.
If a stock meets all five of these criteria, it makes my list as one of three billion-dollar stocks to buy on the cheap.
Billion-Dollar Stocks to Buy: JetBlue Airways Corporation (JBLU)
Jet who? JetBlue (JBLU), that’s who.
Airline stocks have seriously outperformed the S&P 500 Index over the past three years — airlines as a whole generated an annualized total return through June 20 of 14%, around 400 basis points greater than the index — but generally have begun to take it on the chin in the past year; JBLU is no different, off 28% year-to-date.
Clearly, some have begun to question whether the airlines best days are behind it. Fair enough, but I’m really only concerned what investors can expect from JetBlue over the next two to three years.
Fuel, a major cost for all airlines, is helping JetBlue deliver higher operating profits in recent quarters. In the first quarter, its operating profit was $349 million, 37.9% higher year-over-year from Q1 2015, in large part due to a 35.8% decline in fuel costs.
However, two numbers stood out for the airline in Q1, other than the fuel savings. First, excluding fuel and profit sharing, its cost per available seat mile dropped by 3.6% to 7.67 cents. Meanwhile, available seat miles increased by 14.1% to 13 billion. By simply keeping a lid on expenses, fuel and otherwise, JetBlue was able to deliver record results in the first quarter, results that included 21.6% operating margins, better than most of its peers.
With JBLU adding daily flights from Fort Lauderdale to three airports in Cuba, the airline will soon offer more than 120 daily excursions to Caribbean and Latin American destinations. Despite continuing to add capacity at double-digit rates while maintaining a disciplined focus on keeping expenses in check, JetBlue is being valued at less than eight times earnings.
At $16 and change, JBLU stock is available on the cheap.
Billion-Dollar Stocks to Buy: Inovalon Holdings Inc (INOV)
Data is everywhere today. Large or small, if you’re not using the millions of data points that come to you each year in the course of operating your business, you’re failing to take advantage of the benefits of this information.
That’s especially true in the healthcare industry where every little detail can mean the difference between profit and loss. Inovalon Holdings Inc (INOV) helps healthcare companies read between the lines using data integration, advanced analytics, intervention platforms and business processing to make their facilities and operations that much more efficient and ultimately, successful.
Inovalon went public in February 2015, selling 22.2 million shares at $27. Since then, it’s been on a slow ride down below $20. It closed trading June 21 at $17.98, down 33% from its IPO pricing.
The cause for this drop?
Numerous law firms have sought a class action suit against the company for misleading statements by Inovalon about its financial performance including a higher effective tax rate than was indicated in its financial documents filed with the SEC. While the allegations are serious, these types of situations are pretty common in a country that’s very litigious and sports several thousand publicly traded companies. Do your due diligence. But for now, I personally don’t see this being a problem in the long-term.
A quick look at its Q1 2016 results probably has many investors skeptical INOV management know what they’re doing. While year-over-year revenue growth was 10%, earnings dropped right off the charts generating just $2.4 million in net income, significantly less than the $13.8 million in Q1 2015.
Essentially, the company is bringing on clients which cost the company money prior to it being able to generate revenue from those clients. As such, its cost of revenues in Q1 were $41.9 million, 31% higher than a year earlier while its revenues increased by only 10%. Ultimately, on an annual basis, its business model is designed to grow revenue at a greater pace than its cost of revenue, which it has done in two of the last four fiscal years.
Providing data analytics to 20 of the 25 top health plans in America but only 117 of the 456 in total, Inovalon has a lot of potential growth ahead of it.
However, the thing that’s got me most excited about its stock is the first-quarter announcement to initiate the repurchase of $100 million of its stock over the second half of 2016. With more than $700 million in cash and short-term investments, this is a clear indication from management and the board that its stock is undervalued.
I’m not a fan of stock repurchases, mind you, but given the $27 IPO pricing just 16 months ago, this seems like a very prudent decision.
Billion-Dollar Stocks to Buy: Endologix, Inc. (ELGX)
Things are looking up for Endologix, Inc. (ELGX) and its soon-to-be launched Nellix EndoVascular Aneurysm Sealing System that repairs abdominal aortic aneurysms.
Surgeons like it, says RBC Capital Markets analyst Glen Navarro. “Surgeon feedback was very bullish regarding the data and supports our prior survey work and view that Nellix will be a ‘game changer’ in AAA,” Novarro wrote in a note to clients. “Furthermore, we sense that Nellix will become the ‘go-to’ graft in the vascular community and we anticipate strong demand for the device once it is launched.”
Just meeting my billion-dollar market eligibility, ELGX is in the middle of a transition having merged with TriVascular Technologies, Inc. on Feb. 3 of this year. Together, the two companies generated Q1 2016 revenues of $42.4 million, a 16% increase year-over-year. However, on a pro forma basis the two companies delivered a 5% decrease in revenues year-over-year due to disruptions in their businesses due to the merger and only one-and-a-half months in combined results. The pro-forma decrease is based on the two companies being together the entire first quarter. On an adjusted Ebitda basis, it lost $14.1 million — considerably more than the $5.5 million in Q1 2015. However, much of the increase was related to merger expenses.
So why invest in a company that’s losing money? Because, if you’ve watched what’s happened to Intuitive Surgical, Inc. (ISRG) stock over the past decade — 18% annualized total return through June 22 — you know that surgery-related products seem to have significant appeal with investors, healthcare or otherwise.
If the analyst is right about Nellix and it’s a hit compared to its peers’ current products, ELGX stock in two to three years will seem dirt cheap at less than $13.
But be warned, this is the most speculative of my three recommendations. I wouldn’t have this one in the kids’ university education fund.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.