I’ve said it before on InvestorPlace, and I’ll say it again: stocks in the under-$10 group typically aren’t great stocks. After all, stocks don’t IPO or hit the public markets at that kind of price tag. Thus, if a stock is below $10, it is because investors sold the stock off to that level. Usually, such intense selling to below $10 is sign of glaring fundamental weakness.
Having said that, there are some hidden gems in the under-$10 group of stocks. All of these stocks have gone through rough times. But, not all of them will go through rough times forever. Fundamentals aren’t static. They are dynamic. They can change from good to bad, and from bad to good. When the fundamentals for a sub-$10 stock change from bad to good, you usually get big returns in that stock because it was so beaten up to begin with.
But when warnings signs begin flashing, investors need somewhere secure to grow their money. During the financial crisis, investors naturally panicked as the markets plunged, while a small group of traders were able to actually profit. An aversion to losses can be beneficial, but it can also cause you to hold on to losers too long and sell winners too soon. By investing in bulletproof stocks, you can shut off that part of your investing brain that tells you to panic.
With that in mind, I have identified seven stocks under $10 which have been beaten up, but look ready to benefit in a big way from improving fundamentals over the next few quarters to years. In other words, these are depressed stocks which have enormous rebound potential in the foreseeable future.
Who made the cut? Let’s take a closer look at potential stocks to buy under $10.
Stocks to Buy Under $10: General Electric (GE)
Once one of the most valuable and important companies in the world, industrial giant General Electric (NYSE:GE), has tumbled over the past several years. Now the company is a shell of its former self. About 20 years ago, this was a $50 stock. Today GE stock trades below $10.
GE stock has tumbled to below $10 for a good reason. The business became overly complicated and convoluted, and once one of the moving parts in the GE machine started deteriorating, the whole machine started to fall apart. At the same time, in order to build the big and overly complex GE machine, GE took out a ton of debt, so when GE’s businesses started to shrink over the past several years, they did so against the backdrop of an overly levered balance sheet — which just made everything worse.
But, everything could get better over the next few quarters to years. That is, General Electric is dramatically simplifying its operations by shedding non-core, unprofitable businesses and assets. The company is taking the proceeds from those business and asset divestitures to pay down debt. Thus, GE going forward is going to be simpler, more profitable, and less indebted. Ultimately, that means GE is turning into a better business, which should be rewarded with a higher multiple and bigger earnings power — a combination which produces a bigger stock price for GE.
Consequently, at current levels, GE stock looks fairly compelling. This beaten up company is doing everything right to make things better. As things do get better over the next several quarters to years, GE stock should bounce back.
Ford (F)
Much like General Electric, auto giant Ford (NYSE:F) is a fallen U.S. business titan that presently looks like a shell of its former self.
Once upon a time, Ford was one of the most important auto companies in the world. Sales were growing, market share was expanding, margins were big and only getting bigger, and profits were sizable. Now, the exact opposite is happening. Ford simply lost touch with the auto market and got passed by more innovative peers. Sales and market share are dropping, margins are getting squeezed, and profits are small.
Ultimately, Ford stock has gone from above $15 earlier this decade to below $10 today.
But, the future will be much better for Ford than it was in the past, mostly because Ford is finally starting to innovate. Ford is going to massively electrify its vehicle portfolio over the next five years, including launching hybrid and electric versions of the company’s very popular pick-up trucks. This vehicle portfolio electrification will make Ford’s cars more relevant in today’s marketplace than they have been in several years, drive greater consumer awareness and demand, and ultimately lead to higher sales, margins, and profits.
At 6.6 times forward earnings, Ford stock isn’t priced for higher sales, margins, and profits. As such, if electrification does drive all three of those things, Ford stock should shoot higher from here.
Plug Power (PLUG)
Third of this list of stocks to buy under $10 is hydrogen fuel cell maker Plug Power (NASDAQ:PLUG).
PLUG stock is perhaps most infamous for being one of the few stocks which has, quite literally, lost 99.9% of its value over the course of the past twenty years. That’s not a great thing to be know for, and it happened because while there was promise for hydrogen technology early in the auto market, such promise has all but disappeared. Electric batteries became the viable alternative fuel source, and hydrogen cells became an afterthought. As they became an afterthought, Plug Power became irrelevant.
That’s changing now. Plug Power has rattled off consistent 20%-plus revenue growth over the past three years, as hydrogen fuel cells are starting to be adopted in bulk in the commercial market. Sure, the consumer hydrogen market remains sluggish because of infrastructure shortcomings. But, such shortcomings aren’t as important for the commercial market, where a lot of vehicles are operated on-site. As such, big enterprises are starting to come around to the benefits of hydrogen fuel cells, which is that they last longer and have shorter recharging times than their electric battery counterparts.
Can the commercial hydrogen market maintain red-hot momentum, and can Plug Power continue to fire off 20%-plus revenue growth with big margin expansion? Management thinks so. They just laid out an aggressive five-year target which calls for huge revenue growth and even bigger margin expansion into 2024. If Plug Power does hit those aggressive targets, then PLUG stock could soar from here.
VipShop (VIPS)
Fourth, we have Chinese discount e-retailer VipShop (NASDAQ:VIPS), which appears to be getting its winning stride back.
China’s economy started slowing in late 2017 and early 2018. Around that same time, the VipShop growth narrative started to slow dramatically. In late 2017, this was a near 30% revenue growth company. Throughout 2018, VipShop’s quarterly revenue growth rates slowed to 25%, 18%, 16%, and 8% by the end of the year. In early 2019, revenue growth slipped 7%.
In mid-2019, though, this slowdown has reversed course. Last quarter, VipShop reported 10% revenue growth — its first sequential revenue growth acceleration quarter in a long time. This improvement makes sense. Multiple signs are emerging that China’s consumer economy is finally starting to stabilize and improve again. At the same time, the fundamentals underlying China’s digital economy remain favorable, and VipShop dominates the secular demand off-price niche in that market.
Big picture: things are looking up for VipShop. So long as this company continues to dominate the off-price niche, and so long as Chinese macro-economic conditions continue to improve, then VIPS stock should stay on its winning path — it’s already up 70% year-to-date.
Aphria (APHA)
Fifth on this list on stocks to buy under $10 is Canadian cannabis producer Aphria (NYSE:APHA). Aphria is best known as the first cannabis company to strike a profit in the very profit-barren cannabis market. How did Aphria do this? They focused on becoming the lowest cost supplier in the market.
They spent all their resources on figuring out how to reduce the cash cost to produce a kilogram of cannabis. They did just that, and the company now has the lowest unit cash costs in the business. The result? Aphria is able to sell a bunch of cannabis at discount prices into the market, and yet still net a profit on those discounted prices because the production costs are so low.
To me, this sounds a lot like Aphria is becoming the “discount” player in the cannabis market. That’s a valuable niche to dominate. Regardless of the economic environment, consumers are always attracted to low prices. Thus, so long as Aphria can continue to dominate the low price end of the cannabis market, this company will guarantee itself a slice of the global cannabis pie at scale — which could be quite large.
In the long run, then, the bull thesis here is that Aphria leverages its low cost production capabilities to become the discount leader in what projects as a several hundred billion dollar cannabis market at scale. If things do play out like that, then APHA stock should soar in the long run.
GameStop (GME)
Perhaps the most depressed and hated stock on this list is video game retailer GameStop (NYSE:GME), and with good reason.
Let’s not over-complicate things here. In the long run, GameStop is doomed. This is the Blockbuster of the video game world, so as the video game world moves into all-streaming, all-the-time, then GameStop will become irrelevant because no one will need to buy physical video games anymore. This is the inevitable outcome for GameStop, so it makes sense that GME stock has lost over 88% of its value over the past five years.
But, on the way to the graveyard, GameStop should be able to generate tremendous value. That is, the physical video game segment isn’t dead yet, nor will it be dead anytime soon. Instead, the physical video game market could actually go through a few big growth years over the next several years. Why? In 2020, new video game consoles are coming to the market for the first time since 2013. Consumers will need to buy those video game consoles, and some of those consumers will buy those consoles at GameStop. Further, these new consoles are going to have physical disk drives, so physical video game sales should surge in 2020 and 2021, too.
The implication? GameStop is doomed in the long run, but the next few years could be really good for the company. GME stock is not priced for the next few years to be pretty good. As such, it looks like GME stock has healthy upside potential over the next few years.
Bed Bath & Beyond (BBBY)
Last, but not least, on this list of stocks to buy under $10 is beaten up big box retailer Bed Bath & Beyond (NASDAQ:BBBY).
For the longest time, I was anti-BBBY. My thesis was simple: The likes of Walmart (NYSE:WMT), Target (NYSE:TGT) and Amazon (NASDAQ:AMZN) have become all-in-one shopping destinations, and in becoming so, have encroached on Bed Bath & Beyond’s territory.
Bed Bath & Beyond hasn’t been able to defend itself well, since all of those retailers have more resources and reach than BBBY, so they’ve built out bigger and better e-commerce businesses, omni-channel operations, and delivery logistics, the sum of which has caused customers to leave Bed Bath & Beyond stores in favor of Walmart, Target and Amazon.
BBBY stock is down nearly 20% year-to-date, which is as bad a run as any. Investor psychology says that most will let their losses accrue as they believe, irrationally, that they must be due for a “break.” Logically, this is a fallacy that destroys capital. Through intelligent reasoning, however, savvy investors can seperate losses from opportunities and build a “bulletproof” portfolio in the process.
And I think this bear thesis has run its course.
Bed Bath & Beyond is finally taking action to stabilize its rapidly falling revenues, margins and profits, through pulling back discounts, refreshing stores and enhancing its omni-channel presence. In the medium-term, these initiatives should stabilize sales, improve margins and provide a lift to profits. Indeed, consensus Street estimates actually call for EPS to rise over the next few years.
BBBY stock trades at almost 5 times forward earnings. That’s a zero growth valuation. Thus, if earnings do rise over the next several years, BBBY stock should benefit from a double tailwind of that earnings growth coupled with multiple expansion.
As of this writing, Luke Lango was long F, APHA and GME.
