[Editor’s note: This story was originally published in October 2018. It has since been updated and republished. It is likely the author’s opinions have shifted since original publication.]
Everybody loves a deal when it comes to investing. It’s why there are a lot of articles written about stocks under $10 and the reasons you should buy them. This article isn’t one of those.
I decided to write about stocks you shouldn’t buy under $10 after reading an article about Sears Holdings (NASDAQ:SHLDQ) and how its stock’s dropped below $1 and risks delisting. It shouldn’t come as a surprise to anyone that Sears is ready for the scrap heap. It’s been on a retail deathwatch for several years.
The fact is, there are times when stocks under $10, are trading at that level for a reason, and there are other times when a stock is merely misunderstood and ready for a revival.
Generally, I’m a glass-half-full person who likes to pick stocks to buy rather than sell, but for this article, I’m going to recommend seven stocks under $10 that should be sold, if owned, and avoided if contemplating.
Sometimes, a dog stock is just that.
Chesapeake Energy (CHK)
If you bought Chesapeake Energy (NYSE:CHK) stock at the end of 2018, you’re actually up roughly 42% year to date. However, if you bought CHK stock roughly 15 years ago and still hold today — which is unlikely — you’ve lost 0.84% on an annualized basis, much worse than the 10.3% annualized total return for the oil and gas sector as a whole.
A recent article by Seeking Alpha contributor Giovanni DiMauro — the author argued that Chesapeake’s $1.25 billion offering of senior notes at interest rates between 7.0%-7.5% was too high — reminded me why I suggested in August that Chesapeake would not be one the stocks under $10.
It just has too much debt. And even though the bond offering lowers the company’s overall interest rate, it will still have $8.5 billion in debt after the Utica shale divestiture.
However, in August, I did say that buying under $4 was a good play for aggressive investors.
“Its long-term debt is still $9.2 billion or more than double its market cap, although that’s expected to drop with the recent $2 billion disposition of some of its Utica shale assets in Ohio. Like I said last September, for those that can afford to lose their investment, an entry point below $4 remains a good one.
Above that, I’d look elsewhere.”
Now I’m not so sure.
The company keeps insisting that it will get to free cash flow neutrality, but if it can’t do that at $75 a barrel, how’s it going to do it at $55? Only speculators should own this stock.
If you bought Ford (NYSE:F) stock at the end of 2017, you’re down around 8% in that timeframe. Ford hasn’t had an annual gain of more than 20% since 2013. Over the past five years, it’s down 6.0% annually compared to 2.6% for its peer group.
I mention this because, in June 2017, I suggested that Ford stock was dead money until the car maker got a real innovator as CEO. Jim Hackett might be a great guy, but he’s not the person for the job. The September vehicle sales have come out. Ford’s reported that its total U.S. sales fell 11.2% to 197,404 vehicles. Ford’s F-Series declined 8.8% in the first month of fall, although it was competing against strong sales from a year earlier. That said, both Jeep and Ram trucks had record Septembers.
If Ford’s bread and butter (the F-150) can’t grow sales, you can forget about $10. There are better options in the automotive industry and better stocks under $10 to buy.
Groupon (NASDAQ:GRPN) stock is down 26.2% in 2018. Trading at or near its 52-week low of $3.65, the glass-half-full investor might argue that it’s in a better situation today than when it traded near $2 in February 2016.
Perhaps, but I’m sure there is a big segment of the population that has no idea Groupon still exists, and that’s a huge problem. The only reason why Groupon hasn’t retreated to sub-$2 is that the company is shopping itself around and investors are speculating that Alibaba (NYSE:BABA), who owns 5.6% of the promotional deal site, could be a potential virus.
Also, Jim Cramer loves Groupon’s balance sheet and thinks it’s doing well. He’s not wrong. It expects to generate adjusted EBITDA of at least $280 million in 2018, $30 million higher than in 2017. Not to mention its free cash flow yield is currently 8.3%, just inside the 8% value criteria.
However, I just don’t see private equity being interested in Groupon despite having more than $600 million in cash. At the end of the day, only a strategic buyer like Alibaba would be interested, but not at a big premium to its current share price. GRPN will likely stay a stock under $10.
Down 44.5% year-to-date , it’s easy to see how some investors view Snap (NASDAQ:SNAP) as a value buy at these levels. I’m not one of them.
I’ve not been a fan of Snap’s business pretty much since its IPO in March 2017, when it sold 200 million shares at $17 a pop, generating several billion for it to fritter away.
“Sure, they might have read the section of the Snap Inc. prospectus that warned ‘it may never achieve or maintain profitability’ and reflected on this warning, but I highly doubt it,” I wrote in April 2017 discussing the company post-IPO. “The reality is that anyone who bought SNAP stock, young or old, broke one of the cardinal rules of investing: Buy profitable businesses at reasonable prices.”
Analysts, too, have become impatient with Snap’s inability to make money.
“We are tired of Snapchat’s excuses for missing numbers and are no longer willing to give management ‘time’ to figure out monetization,” BTIG analyst Richard Greenfield wrote in a September note. “We incorrectly stuck to our neutral rating in October 2017 due to our view that communications apps were sticky and would protect Snapchat engagement, with management simply needing more time to figure out monetization.”
SNAP, quite simply, is a stock for speculators only.
This time eight months ago, Vipshop Holdings (NYSE:VIPS) was trading above $18, its highest level since November 2015. Then it delivered a couple of underwhelming quarterly earnings reports and the rout was on. It’s now lost two-thirds of its value trading below $6 as I write this.
Three things stand out about Vipshop’s current situation: 1) revenue growth is decelerating, 2) earnings are declining, and 3) active customers have flatlined.
“This was supposed to be a year of market expansion after it struck a partnership deal with two of China’s internet titans, but the win-win-win deal hasn’t resulted in the kind of exposure and uptick in customers that many bulls originally envisioned,” wrote the Motley Fool’s Rick Munarriz September 10. “Vipshop may seem like a bargain today at just 10 times this year’s projected earnings and 8.5 times next year’s bottom-line target, but those profit targets keep dropping as the niche conditions worsen.”
Is it the worst buy of these seven stocks under $10?
Absolutely not, but that doesn’t mean I’d go anywhere near it until it demonstrates a couple of quarters of renewed growth. Until then, you’re definitely not putting your investment capital to its best use.
After a massive rebound in 2017 — it had a 55.6% total return — it’s not surprising that Zynga (NASDAQ:ZNGA) stock has gone sideways in 2018, up about 2% YTD.
Like Groupon, Zynga is one of those companies that seems to fly under the radar. With games like FarmVille (14% of revenue in Q2 2018), CSR Racing (14%), Slots (27%) and Zynga Poker (23%) continuing to generate revenue growth for the game developer, it’s easy to see why it still has investor support.
Valued at $3.4 billion, that’s a lot of money for a company that’s never made more than $125 million in operating income. Currently trading at 37 times cash flow, you can buy Activision Blizzard (NASDAQ:ATVI) stock for less than 31 times cash flow, a company that has ten times the operating income.
Oh, and in case you were wondering, ZNGA stock hasn’t traded above $10 since April 2012.
The last of our stocks under $10 to avoid is NIO (NYSE:NIO). NIO went public on September 11, 2018, selling 160 million shares at $6.26 for net proceeds of $954.9 million. It had a strong start gaining 5.4% on its first day moving as high as $11.60 within a couple of days of its IPO. Since then the Chinese electric vehicle maker has given back all of its gains and looks ready to fall below $6.
Nio wants to deliver a Tesla-like vehicle at a lower cost. However, if experience making cars is important to you, you’ll want to avoid its stock.
“Nio’s not a stock we have any interest in,” said Mark Tepper, president and CEO of Strategic Wealth Partners, managing over $1 billion in assets, told Business Insider. “An unproven management team along zero experience in manufacturing cars makes this an easy stock to steer clear of.“
Since launching its ES8 SUV in December 2017, the company’s delivered just 1,602. It has another 15,778 unfulfilled reservations; 39% have a $6,544 non-refundable reservation. The remaining 61% of reservations have a $727 fully refundable deposit. It also has plans to launch the ES6, a 5-seater SUV by the end of 2018, with deliveries in the first half of 2019.
And like Tesla (NASDAQ:TSLA), Nio doesn’t make money. In the first six months of fiscal 2018, Nio had revenues of $7.0 million and a net loss of $502.6 million.
If you’re going to bet on an electric vehicle maker, Nio isn’t the one.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.