[Editor’s note: This story was previously published in Dec 2018. It has since been updated and republished.]
As Warren Buffett likes to say, “price is what you pay, value is what you get.” It’s the reason why a $300-per-share stock can be cheap, while a $3 one can be expensive. With that said, there’s something about low-priced stocks that captivates investors’ imaginations. After all, there’s nothing like being able to buy a ton of shares for dirt cheap and having them take off. And there is some method to this madness.
For example, the Fidelity Low-Priced Stock Fund (MUTF:FLPSX) has managed to return nearly 15% annually over the last 10 years. That return has managed to beat both the small-cap-focused Russell 2000 and Russell Midcap Index over that time. Low-priced stocks can be a big source of additional alpha and returns.
The key is that many low-priced stocks are cheap for a reason. Finding the ones that have the potential for greatness or overcoming their issues is vital. They are a gamble, but the payoff can be big for portfolios. The idea is to keep your bets small and broad.
For investors looking to put some risk capital to work, here are five low-priced stocks that have great potential in the new year.
Dova Pharmaceuticals Inc (DOVA)
Closing Share Price on Mar. 5: $7.75
Over the summer, Dova Pharmaceuticals (NASDAQ:DOVA) was riding high. The biotech firm had scored an approval for their drug Doptelet. The drug is used to treat thrombocytopenia — which is a low-blood-platelet disorder. With that disease, patients find it hard to form blood clots and suffer major bleeding from even a small injury. The drug has plenty of blockbuster potential. Unfortunately, that potential hasn’t lived up to expectations.
Management then cut sales guidance for the drug down to just $2.4 million. That’s about half of what Wall Street was looking for. At the same time, several key executives left the company. Naturally, investors are spooked and shares have nose-dived, dropping from a recent high of nearly $32 per share in June down to under $8.
But that could be a great buying opportunity for this low-priced stock.
For one thing, the potential for Doptelet is there. DOVA is looking to fast-track Doptelet for other indications of thrombocytopenia. That will expand the usage of the drug and bring in more revenues. Secondly, Dova has replaced many of its outgoing managers with executives from winning biotechs like United Therapeutics (NASDAQ:UTHR) and Vertex (NASDAQ:VRTX).
With that, analysts still have price targets in the $20 to $30 range on this low-priced stock.
Closing Share Price on Dec. 19: $5.24
Internet travel websites are known for their profitability, as their margins remain crazy high. However, for hotel booking site Trivago (NASDAQ:TRVG) that hasn’t been the case over the last year or so. TRVG has spent much of the last few quarters disappointing investors and has lost money. That’s sent shares tumbling and below $6 per share.
However, TRVG may be a bargain among low-priced stocks.
For one thing, the bleeding seems to have stopped. While revenues continue to drop, profits have come back to the travel site. Trivago managed to post net income of 11.7 million euros last quarter.
And other things have gotten better for TRVG as well. It expects its adjusted EBITDA this year to come in ar e0 million euros to 75 million euros, and it predicts that its revenue will increase in the second half of the year versus the same period in 2018.
When it comes to low-priced stocks, Trivago’s turnaround is one to bet on.
Barclays PLC ADR (BCS)
Closing Share Price on Dec. 19: $8.69
One of the biggest shadows on the entire market happens to be the dreaded Brexit. Naturally, the U.K.’s exit from the European Union hasn’t gone smoothly. Heck, at this point, an exit might not happen even at all. Because of that, it has thrown plenty of uncertainty over stocks in the United Kingdom. This includes U.K. banking giant Barclays PLC ADR (NYSE:BCS).
BCS never fully recovered from the financial crisis, and the latest Brexit woes have put a hurt on its share price, which currently rests below $9 per share. But that low price does offer some bang for the buck.
For one thing, Barclays is dirt cheap and can be had for a price to book ratio of less than 0.5.. At the same time, BCS is continuing to court more international high-net-worth investors from the Middle East. Additionally, recent moves into fintech have improved its margins.
All of this is starting to pay-off. In 2018, the bank’s EPS came in at £21.9 and Barclays Group had total net income before tax of £3.5 billion, while Barclays International’s total net income before tax was £3.8 billion.
Closing Share Price on Dec. 19: $8.05
Sometimes low-priced stocks are being punished for things that happened years earlier. Case in point, real estate investment trust Vereit (NYSE: VER). VER’s issues started back in 2016 when it was called American Realty Capital Properties. American Realty was created by combining several non-traded REITs, and it quickly became one of the largest single-property REITs in the country. At its peak, it held more than 4,600 different properties. Unfortunately, executives at the firm weren’t so great and it turned out that they used all sorts of questionable accounting tricks.
Naturally, shares of VER sank like a stone when the news came out. Several lawsuits, jail time, a dividend cut and a name change bring us to Vereit. And that’s actually a good thing.
The new management at the firm has worked to reduce and prune its portfolio of underperforming and “flat” leased properties. Debt reduction and bolstering its balance sheet have also been a priority. These efforts have helped and VER finally started to turn the corner. Cash flows continue to be robust and the firm is able to pay its juicy 7%-plus yield.
The problem remains the overhang of lawsuits from shareholders. But with many shareholders already settling, VER is getting closer to being 100% free from its past. With the end in sight, the real estate firm could be one of the most sure things when it comes to low-priced stocks.
Disclosure: At the time of writing, Aaron Levitt did not have a position in any of the stocks listed, but was considering initiating a position in DOVA.