Cheap stocks are usually cheap for a reason. And that reason isn’t a good one. Because of this, investing in cheap stocks can actually be risky.
But cheap stocks on the rise are a different story. Cheap stocks on the rise are usually rising for a reason. And that reason is a good one. It’s because either the stock got too cheap or the growth prospects are improving, or both.
Because of this, investing in cheap stocks on the rise can actually be quite rewarding.
With that in mind, here is a list of 3 cheap stocks that are already on the move higher due to improving operations.
Cheap Stocks on the Rise #1: Pandora Media Inc (P)
The first stock on this list may come as a complete surprise considering its core business is still in free-fall, but streaming music company Pandora Media Inc (NYSE:P) is actually a cheap stock on the rise.
The company started to turn around its business by finally pivoting away from its core ad-supported streaming music platform. Pandora just acquired digital-audio tech firm AdsWizz, and in doing so, potentially changed the entire company’s growth narrative from dying streaming music platform to growing audio-streaming advertising marketplace.
AdsWizz is a firm that specializes exclusively in digital audio advertising. Based on management commentary, it seem like Pandora is planning on using AdsWizz to create a centralized digital audio advertisement marketplace. This could have potentially huge effects, seeing as the digital audio advertising market is expected to grow by a ton over the next several years as radio ads shift to the digital format.
In other words, the whole idea is that the AdsWizz acquisition accelerates Pandora’s ad-tech roadmap, thrusts the company more deeply into the secular growth audio advertising market, ditches the company’s reliance on its struggling streaming music platform, and opens up new revenue opportunities.
That is a solid formation for a bull thesis on Pandora stock.
Meanwhile, the company just reported first quarter numbers, and they were much better than expected. While the core ad-supported streaming music platform continues to dwindle in popularity, the subscription business is actually growing nicely, and that fits in well with this company’s big turnaround story.
Pandora stock used to be north of $30. Today, it is still only $7. Therefore, if this turnaround plays out to completion, Pandora stock could still head markedly higher.
Cheap Stocks on the Rise #2: NutriSystem Inc. (NTRI)
Weight management services provider NutriSystem Inc. (NASDAQ:NTRI) used to be a big growth company with 20%-plus revenue growth and healthy long-term margin drivers.
But NTRI botched the start of the 2018 Diet Season, largely due to complacency in the video ad campaign and lack of innovation in the product pipeline. Consequently, revenue and margin growth to the start the year slipped into negative territory, and NTRI stock dropped.
But the company’s first quarter numbers were actually much better than expected, and illustrated that early 2018 headwinds are now largely in the rear-view mirror. Consequently, the longer-term growth narrative in now coming back into focus, and that narrative is largely positive considering secular tailwinds in healthy eating and active lifestyles remain as strong as ever.
With that longer-term narrative back in focus, NTRI stock looks dirt cheap here and now. This is a double-digit revenue growth company with healthy margin drivers, the sum of which should drive nearly 20% earnings growth over the next 5 years. NTRI stock trades at just 16-times forward earnings, which is dirt cheap for 20% earnings growth.
Also, NTRI stock usually trades at 23.5-times forward earnings. Thus, today’s 16-times multiple is a pretty steep 30% discount to “normal”.
NTRI stock did bounce back above $30 following the company’s strong Q1 report. But there is a strong argument for why this stock should head to $40 and up in a hurry, considering the strong growth prospects and still discounted valuation. As such, this is one of the best cheap stocks to buy.
Cheap Stocks on the Rise #3: Facebook Inc (FB)
At 23.5-times forward earnings, Facebook Inc (NASDAQ:FB) isn’t exactly your traditional “cheap” stock. But I’d argue it is actually one of the cheapest stocks in the market.
Facebook stock got knocked down recently by a really bad PR incident now known as the Cambridge Analytica scandal. A whistleblower blew the lid open on a data leak that happened 3 years ago and may have impacted the 2016 Presidential Election. But amid that awful PR incident — which was arguably the company’s worst PR incident in history — Facebook proceeded to report what was arguably the company’s best earnings report in history.
Revenue growth accelerated. Margin expansion remained robust. User growth remained strong. Engagement trends were healthy.
Those overall strong results are a testament to the company’s business model, the platform’s value, and management’s ability to navigate through turbulent waters.
As such, things are back to normal for Facebook. And “back to normal” implies 30%-plus revenue growth over the next several years alongside healthy margin drivers. That combination should lead to at least 35-40% earnings growth per year.
Facebook stock trades at just 23.5-times forward earnings.
That is dirt cheap for 35-40% earnings growth. Plus, this stock normally trades at 34-times forward earnings, so today’s 23.5 multiple seems like a big bargain.
All in all, Facebook stock has staged a huge comeback. That comeback is far from being done. A still cheap valuation and only strengthening growth prospects imply a ton more upside for Facebook stock. Consequently, this is also one the best cheap stocks to buy.
As of this writing, Luke Lango was long FB, P, and NTRI.