Stocks under $5 usually aren’t the best stocks. After all, almost every company prices their initial public offering at $10 per share or more. Thus, if a stock is trading under $5, that means the stock has most likely been subject to a 50%-plus sell-off, which is a sign that the company is having major trouble.
For this reason alone, stocks under $5 should be classified as high-risk stocks by investors.
But, some of them should also be classified as high-reward stocks. Again, stocks under $5 got there because investors sold them in bunches. That means investor sentiment surrounding these stocks is depressed, and expectations are low. If the company can top those low expectations and sentiment dramatically improves, these same really beaten up stocks can become huge overnight winners.
This has happened a lot recently. See Snap (NYSE:SNAP), which went from a $5 stock to a $10-plus stock in a few weeks thanks to user base stabilization. Or Pandora, which went from $4 to $8 on operational stabilization and a buyout offer.
Those sorts of jumps aren’t isolated. They happen all the time — but only to the right cheap stocks. Which stocks are those? Let’s take a look at seven high-risk, high-reward stocks under $5 that could soar on the right catalyst.
Stocks Under $5 That Could Soar: Blue Apron (APRN)
Meal kit maker Blue Apron (NYSE:APRN) went public at $10 per share in mid-2017. It’s been nothing but downhill ever since for APRN stock. Competition stiffened up. Growth stalled out. The whole meal kit market was hit by demand headwinds. Overall, Blue Apron failed to grow in a way that satisfied investors, and APRN stock had dropped under $1 by late 2018.
But Blue Apron shares have been injected with some life over the past few months as signs have emerged that a huge turnaround may be around the corner. Specifically, Blue Apron announced a big meal-kit partnership with Weight Watchers (NYSE:WTW), which management said would stabilize the customer base without the company having to spend big on marketing. Shortly thereafter, management said that WTW deal was seeing higher-than-expected demand, and that Blue Apron would be adjusted EBITDA profitable in Q1 and fiscal 2019.
The dots here aren’t hard to connect. Essentially, it appears that Blue Apron may be carving out a weight-loss niche for itself in the hyper-competitive meal kit marketplace with its Weight Watchers partnership. If so, growth will stabilize over the next several years without big expense growth, margins will improve, and profitability will become a real possibility.
If all that happens, APRN stock could run way higher from here.
Pier 1 (PIR)
Home furnishings retailer Pier 1 (NYSE:PIR) has been an eyesore in the struggling retail industry for a long time now. In a nutshell, the emergence of online-only home furnishings retailers like Wayfair (NYSE:W) — which often have lower prices — have rapidly and dramatically stolen market share from Pier 1. The result? Sales and margins are down big. Profits have been wiped out. PIR stock has dropped from around $20 five years ago to 30 cents in late 2018.
But, PIR stock has been on a tear recently, rising by five-fold from 30 cents to $1.50 in just three months. It’s nearly impossible to pinpoint an exact catalyst behind this monstrous rally besides that the stock got way too cheap. At 30 cents per share, Pier 1 was being valued at a $25 million market cap, and yet sales over the past 12 months measure over $1.6 billion. Still, at $1.50, Pier 1 is being valued at a market cap of just $121 million, which is still anemic next to a $1.6 billion sales base.
To be sure, profits are negative over that same stretch, the balance sheet isn’t as clean as it could be, and the sales base is shrinking. Nonetheless, all Pier 1 needs is 2% profit margins margins on a $1 billion sales base to net $20 million in profits. Even a super depressed 10x multiple on that implies a $200 million market cap under such scenarios. Further, if profit margins hit 2% on a $1.5 billion sales base, the same math implies a $300 million market cap.
It’s a tall order for management to cut costs and stabilize sales at the same time. But, if they manage to pull it off, this stock could keep soaring in a big way.
Big 5 Sporting Goods (BGFV)
Much like Pier 1, sporting goods retailer Big 5 Sporting Goods (NASDAQ:BGFV) has been an especially large victim of the e-commerce revolution. With respect to Big 5, the negative catalyst has been the widespread emergence and popularity of direct athletic retail channels, the sum of which has taken market share from Big 5, and caused sales, margins, and profits to drop. Concurrently, BGFV stock has dropped from $20 to $2.50 in a few years.
But, also much like Pier 1, shares of Big 5 have been injected with life over the past few months. Since late 2018, BGFV stock has popped from $2.50 to near $4. The catalyst? Comparable sales trends improved during the holiday season. Comps actually hit positive territory in December. Margins stabilized. Losses narrowed. Overall, Big 5’s numbers simply got better. BGFV stock reacted positively in response.
Importantly, this improvement isn’t isolated. Fellow sporting goods retailers Dick’s Sporting Goods (NYSE:DKS) and Foot Locker (NYSE:FL) have also reported improving numbers over the past several quarters. In other words, it increasingly appears that the worst is over for sporting goods retailers, and that this market will stabilize over the next several years.
As it does, Big 5’s growth rates should likewise stabilize, and that should allow BGFV stock to stay in rally mode.
The market consensus on savings and coupons platform Groupon (NASDAQ:GRPN) is that the company’s time has come and gone, and that the digital economy is evolving to a point where consumers simply don’t need Groupon anymore. That is largely why GRPN stock has dropped from $20-plus in 2011, to under $3 in late 2018.
This overarching bear thesis doesn’t make much sense to me. Sure, Groupon’s customer base isn’t growing. But it’s not dropping by a material amount, either, and those slight drops are happening against a stiff competitive backdrop wherein e-commerce giants like Amazon (NASDAQ:AMZN) and Walmart(NYSE:WMT) are already aggressively discounting everything. Thus, competition is about as big as it will ever get, and Groupon’s user base is still largely stable. Consequently, the data seems to support the thesis that Groupon has long-term staying power.
Staying power doesn’t equal growth, though, and without growth, it will be tough for GRPN stock to rally here. Fortunately, there is a pathway for growth for Groupon. Specifically, Groupon has to execute on three initiatives over the next several years: deliver exceptional discounts on local-oriented experiences, pivot to voucherless transactions and improve the mobile, on-the-go customer experience.
If Groupon executes on those three growth initiatives, then GRPN stock will soar from current levels over the next several years.
Much like Pier 1 and Big 5, women’s clothing retailer Francesca’s (NYSE:FRAN) has been a outsized loser in the e-commerce revolution. As that revolution has become more widespread, Francesca’s pain has only grown. Comps have gone more negative. Margins are have been eviscerated. Profits are all gone. And, FRAN stock has gone from $20-plus in late 2016, to under $1 today.
But, there’s reason to believe that a big rally could be around the corner. Specifically, the company has essentially put itself up for sale after all other options have been exhausted. On one hand, that means hopes for this stock to get back to $20 have been axed. On the other hand, a potential buyout means that buyers here could be in for a big payday soon.
Fortunately, there should be suitors. FRAN stock currently has a market cap of just $31 million, and enterprise value of $20 million thanks to a cash-heavy balance sheet. Sales over the past 12 months measure about $450 million. At one point in time, this company had 10%-plus profit margins. Thus, it isn’t hard to imagine Francesca’s getting back to 2% profit margins on a $400 million sales base. That math implies $8 million in net profits, which realistically equates to an $80 million market cap, based on a depressed 10x multiple.
In other words, FRAN stock looks like a cheap stock here — cheap enough to attract some serious M&A interest.
Volatility is an inherent feature of stocks under $5, since the fundamentals on these stocks can often change dramatically and quickly. This is especially true for EV charging company Blink Charging (NASDAQ:BLNK). As the fundamentals underlying this company have dramatically changed multiple times over the past several years, BLNK stock has gone from over $30 to under $2, back to $8, and then back to $3. Thus, you can’t really trust any move higher in BLNK stock as sustainable.
Having said that, the secular growth narrative here is promising. The EV revolution is in the early stages of a massive growth narrative. Within the next ten to fifteen years, most cars on the road will be electric powered. As such, within the next ten to fifteen years, there will be a mass proliferation of EV charging stations, too.
Blink makes such charging stations. Thus, the only real concern here is competition. Unfortunately, there’s plenty of competition — enough to cloud the long-term bull thesis. Nonetheless, if Blink can successfully out-execute that competition and take home just a fraction of what promises to be a huge global EV charging station market, then BLNK stock could fly higher from current levels.
All things considered, BLNK stock is the archetype of a high-risk, high-reward stock under $5.
Sirius XM (SIRI)
Unlike other stocks on this list, broadcasting company Sirius XM (NASDAQ:SIRI) has been on a long term uptrend. The company was essentially left for dead in the aftermath of the 2008 Financial Crisis. Since then, despite secular headwinds from the growth of music streaming, Sirius has been able to grow its user base, revenues, and profits at a steady and consistent rate. Consequently, SIRI stock has gradually climbed from 10 cents in 2009, to $8 in mid-2018.
SIRI stock has flattened out over the past year. Subscriber growth has slowed. So has revenue growth, and average revenue per user growth. Margin are dropping. Profit growth is stalling out.
In other words, it increasingly appears as though Sirius is starting to the feel the heat from streaming music competition. But, that doesn’t mean the Sirius growth narrative is over. Instead, given that the likes of Spotify (NYSE:SPOT) and Apple Music are already everywhere in the U.S., it simply means that the Sirius growth narrative is slowing going forward. Sirius won’t lose subs. They simply won’t add that many more.
In such a world, SIRI stock will head higher, given its ability to raise prices and grow profits even with stalled out sub growth.
As of this writing, Luke Lango was long WTW, DKS, FL, AMZN, SIRI, and SPOT.