Market volatility in 2022 has caused many compelling stocks to now trade for less than $1 per share. While the under-$1 territory is often associated with riskier penny stocks, hidden gems with solid fundamentals can be uncovered by discerning investors. As Warren Buffett famously said, “price is what you pay, value is what you get.”
Even quality companies can temporarily see their share prices driven below $1 due to market psychology or other macroeconomic factors. However, investors who spot these opportunities and have a long-term perspective could generate massive returns if the business’ prospects improve.
As we head further into the second half of 2023, such pink-sheet stocks could bottom out and start a turnaround next year. Thus, here are the three stocks trading under $1 that are too cheap relative to their potential.
Ayr Wellness (AYRWF)
As a leading vertically integrated U.S. cannabis multi-state operator, Ayr Wellness (OTCMKTS:AYRWF) offers exposure to the high-growth marijuana industry. While the company has faced recent challenges with profitability, I believe Ayr possesses strong assets and brands that position it for an eventual turnaround.
In Q1 2023, Ayr grew revenue by 18% year-over-year but saw a net loss of $195 million. Encouragingly, the company generated positive operating cash flow for the third straight quarter, reflecting early progress on its optimization plan to drive cost savings and improve working capital. Ayr expects to build on this momentum and achieve positive cash flow for the full-year 2023.
To drive growth, Ayr plans to expand its retail footprint in its key market in Florida. With seven new store openings already this year and 10 more planned, Florida provides a substantial growth avenue as Ayr maps the state for its 70 targeted locations. I’m also optimistic about the company’s expansion into Ohio, where it recently acquired two dispensary licenses that should open later this year.
While near-term industry headwinds persist, Ayr owns leading brands and dispensaries that position it well for the eventual adult-use transition in markets like Florida. With its beaten-down valuation at just 0.6-times sales, I see sizable upside potential for AYRWF stock once macro conditions improve. The average Wall Street price target implies upside potential of more than 500% from here.
As the largest producer of infant milk formula in China, Feihe (OTCMKTS:CHFLF) presents an attractive opportunity to gain exposure to a defensive consumer staples business. While revenue is expected to decline 3.8% this year, Feihe is expected to see revenue bounce back next year with positive 12% year-over-year growth.
Feihe also maintains a strong balance sheet with $2.8 billion of cash against only $218 million of debt. Its healthy cash position provides stability during economic uncertainty. Additionally, the company pays an annual dividend yielding nearly 10%.
I think paying just 7-times trailing earnings for this leader in infant formula and recession-resistant business model is very much worth it. CHFLF appears poised to outperform when China’s economy rebounds from COVID-driven weaknesses. Its emphasis on product R&D and quality assurance also positions it well to capitalize on premiumization trends in infant formula. Gurufocus estimates its fair price value at $2, well above its current price of 55 cents, primarily due to its all-green balance sheet.
ADDvantage Technologies (AEY)
Providing communications infrastructure services and equipment, ADDvantage Technologies (NASDAQ:AEY) operates through two segments: telco and wireless. The company has faced recent revenue declines as a result of inventory rationalization by customers. However, with wireless infrastructure spending set to reaccelerate, I believe AEY stock presents deep value at current levels.
ADDvantage’s wireless business is impressive, with the company boasting extensive experience managing 5G construction projects for carriers like Dish Network (NASDAQ:DISH). As macro conditions improve industry-wide over the long-run, the company’s exposure to secular 5G trends positions it for a revenue rebound. ADDvantage also plans to capture rural broadband funding for fiber network builds, representing a new growth avenue.
Trading at just 0.1-times EV/Revenue and 0.06-times sales, AEY stock appears significantly undervalued relative to its long-term growth potential. Its services will remain in demand as 5G investments roll out over the next decade. As network operators resume spending in 2024, ADDvantage looks poised to reward patient investors. There is no Wall Street or Gurufocus coverage with this company, but I believe a fair price target should be $1.30 at the very least.
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On the date of publication, Omor Ibne Ehsan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.