Let’s start this article by stating that stocks under $10 aren’t necessarily cheap stocks. This is a common misconception. In the financial world, “cheap” is a valuation measure — a low price-to-earnings multiple, or low price-to-book ratio. Just because a stock is trading with a single-digit price tag, that doesn’t necessarily imply cheap. Profits could be in the cents per share region, so the price-to-earnings multiple on a stock under $10 could still be quite big.
Broadly, then, stocks under $10 and cheap stocks are not the same thing.
Having said that, stocks under $10 do share many commonalities with cheap stocks. Importantly, both have huge potential upside in the event of a positive catalyst.
Why? Because although a stock under $10 may not be cheap, it is almost certainly depressed. Stocks don’t go public at anything less than $10 per share, and often go public somewhere north of $15 per share. Thus, if a stock is trading down in the single-digit range, it has been sold off to those levels and investor sentiment surrounding the stock is heavily negative.
Because of this, stocks under $10 could soar if investor sentiment pivots meaningfully due to a positive catalyst, or series of positive catalysts. In this sense, the upside potential of stocks under $10 is similar to the upside potential in cheap stocks.
With this in mind, let’s take a look at stocks under $10 that have big upside potential in the event of an investor sentiment reversal.
Price Tag Today: $8.30
The first stock on this list is an undervalued cannabis company with big upside potential in the event that the company shores up its balance sheet to compete with more well-funded peers.
Aurora (NYSE:ACB) is one of the leaders in the Canadian cannabis market. To be specific, Aurora is the second-biggest player in the Canadian cannabis market, only narrowly behind market leader Canopy (NYSE:ACB) and miles ahead of peers Tilray (NASDAQ:TLRY) and Cronos (NASDAQ:CRON).
Yet, despite Aurora’s huge size, ACB stock is relatively undervalued. Each kilogram of cannabis produced at Aurora last quarter is valued by the market at less than $1 million. The average valuation of kilogram of cannabis produced last quarter at Canopy, Aurora and Tilray is $2.5 million, with the minimum being $1.5 million.
Thus, Aurora is way undervalued relative to peers. Why? Its balance sheet. Cronos and Canopy both have multi-billion dollar investments from consumer staples giants. Aurora does not. But, this won’t be true for long. If Aurora continues to trade at this cheap valuation, and the company continues to grow a robust rate, then it’s only a matter of time before big money moves into this name. When that happens, this valuation discrepancy will no longer have any reason to exist, and ACB stock will fly higher.
Price Tag Today: $3.85
Next up, we have the Chinese version of an early stage Tesla (NASDAQ:TSLA), and this stock could soar into the end of the year if delivery numbers improve after a rough start to 2019.
For all intents and purposes, NIO (NYSE:NIO) is the Tesla of China. The company makes premium electric vehicles catered to the high-end demographic, and has established meaningful and valuable brand equity in the Chinese luxury EV market.
But, NIO is much younger than Tesla (they just started deliveries in 2018), and this early in the company’s growth narrative, investors need to see a consistent sequential ramp to justify buying into the story. That sequential ramp fell through in early 2019, as early 2019 delivery volume dipped below late 2018 levels. Ever since that sequential ramp fell through, NIO stock has collapsed, from $10-plus prices, to below $4 today.
But, NIO already announced that Q1 deliveries exceeded guidance, meaning that the delivery volume trend is already improving here. If this trend continues to improve, and it should, given that NIO has unveiled a new sedan model against the backdrop of a China EV market that continues to boom, then NIO stock should bounce back in a big way from today’s depressed levels.
Price Tag Today: $7.80
Third, we have a Chinese e-commerce stock that could pop as China’s consumer digital economy continues to expand in 2019.
Vipshop (NASDAQ:VIPS) is a China e-retailer which focuses on the off-price and discount segments. It’s very much like the Chinese online version of a Ross Stores (NASDAQ:ROST), TJX (NYSE:TJX), Kohl’s (NYSE:KSS) or even Five Below (NASDAQ:FIVE). Those companies are doing just fine in the U.S. retail market because the off-price niche has enduring consumer appeal. Thus, the outlook for Vipshop to keep growing in a rapidly changing China retail marketplace is favorable.
Further, Vipshop just reported solid first-quarter numbers which underscore that, as China’s consumer economy has stabilized and improved in early 2019, so has Vipshop’s growth trajectory. Thus, so long as China’s consumer economy continues to improve throughout the balance of the year, Vipshop’s growth rates should likewise improve, and VIPS stock should rise.
To be sure, the trade war is a big risk here. If the trade war gets worse, and China’s consumer economy suffers as a result, VIPS stock will struggle, too. Thus, investors should proceed with caution on VIPS stock.
General Electric (GE)
Price Tag Today: $9.50
Fourth, we have an American titan that has fallen from grace, but looks positioned to make a multi-year rebound as the company slims down and smartens up.
The story of General Electric (NYSE:GE) is well known. This used to be one of America’s most important and valuable companies. But, years of over-growing, mismanagement, bad bets and lack of innovation led to this stock crumbling into a shell of its former self. Now, the company is trying to bounce back.
These bounce back efforts have been promising thus far. The company is slimming down its operating portfolio, and shedding assets that either aren’t profitable or aren’t related to the core business. In so doing, the company is simplifying operations, cleaning up the balance sheet and improving the cash flow profile. Management has also doubled down on important growth initiatives, like the industrial IoT market.
In other words, the company is doing everything right to stabilize this sinking ship and improve the financials going forward. As such, GE stock looks ready to bounce back. This recovery will take a while. But, below the critical $10 level, GE stock looks good here.
Price Tag Today: $9.50
Last, but not least, is a U.S. automotive giant that has faced its share of challenges, but is finally ready to bounce-back thanks to favorable market conditions and innovation.
Everyone knows Ford (NYSE:F). Great pick-up trucks. But, great pick-up trucks haven’t been enough over the past several years. The auto market has been challenged by secular headwinds in the ride-sharing market, so car ownership rates are actually dropping. At the same time, Ford hasn’t really innovated in its product portfolio, and has consequently lost share to more innovative peers like Tesla who are pushing hard on the EV front.
But, Ford is ready to bounce back. For starter’s, although the auto market is shrinking due to low car ownership rates, U.S. economic conditions continue to support a healthy auto market (low rates, low unemployment and strong wage growth). Further, Ford is finally innovating in the market, and aggressively pivoting into the EV space. Thus, market share erosion could turn into market share stabilization, and that could further lead into margin stabilization.
In other words, Ford is going from an era of market share and margin erosion, to market share and margin stabilization. That transition will ultimately push Ford stock higher from here.
As of this writing, Luke Lango was long ACB, CGC, NIO, TJX and F.