InvestorPlace contributor Luke Lango stated in November that Groupon (NASDAQ:GRPN), the local discounts marketplace, was worth $3 a share. Since hitting a 52-week low of $2.31 in mid-August, Groupon stock is up 20% and now trades within 22 cents of $3.
Luke’s commentary got me to thinking: Is GRPN the best stock under $3 at the moment? I’m not sure. Let’s take a look at some of the possibilities.
According to a quick stock screen I’ve done, there are 51 companies with market caps of $300 million or higher and trading at $3 or less. That leaves me with a lot of choices. Possibly too many. To whittle the number down, I’ve eliminated stocks that don’t have a positive net margin.
Interestingly, that eliminated Groupon. However, I know two things about its financials that merit its inclusion: It generates positive free cash flow and has delivered two straight years of adjusted profits. So, GRPN stock stays.
Moving to plan B, I’ve excluded any stock that doesn’t have a price-to-free-cash-flow multiple, which narrows the search to 26 companies, including Groupon.
And we’re off.
Comparing Groupon Stock
In March 2018, I picked $10 stocks under $10. That came on the heels of a 2014 article that chose five cheap stocks to buy. The 2014 article produced mixed results at best. The 2018 article’s produced several winners but not enough to consider it a job well done.
Low-priced stocks are often low for a reason.
One of the stocks on the 2018 list was Trivago (NASDAQ:TRVG). In March 2018, it was trading around $8. It’s now down below $3.
Why do I like TRVG as a “best under $3” candidate?
When I wrote about the hotel comparison site in 2018, it was still losing money. Through the nine months ended Sept. 30, Trivago had a $14.0 million profit on $682.5 million in sales. On an EBITDA basis, Trivago generated $50.3 million in profit compared to a $13.0 million loss a year earlier.
In Trivago’s Q3 2019 conference call, CEO and founder Rolf Schrömgens pointed out that it was the company’s fifth consecutive quarter of profitability. Furthermore, Schrömgens said that it is pleased with the progress it’s made over the past 18 months integrating alternative accommodations into the Trivago platform.
Schrömgens is so confident of the company’s future that he announced that he would step aside as CEO, promoting CFO Axel Hefer to the top job.
At less than $3, the risk/reward since March 2018, has completely tilted in the investor’s favor.
A New Name But Same Old Business
On November 5, PPDAI Group became FinVolution Group (NYSE:FINV), a Chinese company listed on the NYSE that uses technology to connect individual borrowers in China with interested lenders and funding partners.
The consumer finance opportunity in China is tremendous.
For example, in the U.S., consumer credit accounts for 20% of America’s GDP (PDF Download). In China, consumer credit only accounts for 13% of GDP. Also, only 46% of adults in China have credit records compared to 81% in the U.S.
Meanwhile, there are over 5,000 licensed financial institutions in China, many of them with little or no consumer finance experience.
Finvolution would like to remedy this disconnect.
As of the third quarter, FinVolution had 5.5 million active customers borrowing, on average, $450 over an average duration of 8.2 months. Approximately 79% of customers are repeat borrowers.
In the third quarter, FinVolution generated a net profit of $84 million, 8.0% lower than a year earlier on $212 million in revenue. Meanwhile, while profitability dropped slightly in the third quarter, its cash flow more than doubled from Q2 2019.
I’ve got to take a much closer look at this business, given the troubles surrounding consumer finance businesses here in the U.S.
That said, if you’re a speculative investor, FINV stock could be the risk/reward profile you’ve been looking for.
The Bottom Line on Groupon Stock
As I stated at the outset, buying low-priced stocks can be like walking through a minefield.
In late October, I called Groupon, a “dog with fleas.” I’m confident nothing has happened to change my mind.
Is Groupon the best stock under $3? No, it’s not. Not even close.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.