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| Photo by Scott Graham on Unsplash |
Navigating the world of low-priced stocks can be challenging, as it’s often filled with risky investments. When a stock has a low share price, it could be a sign that something is seriously wrong with the company’s business. However, among these potentially problematic investments, there are hidden gems that offer great potential. These stocks possess strong business fundamentals and are worth considering for investment.
To identify high-quality stocks priced at $10 or less, we need to focus on analyzing the underlying businesses. Key ratios such as profit margins, return on equity, and revenue growth can provide valuable insights into a company’s performance. By examining these metrics, we can gauge the financial health and growth prospects of a company.
Alvin Carlos, a certified financial planner and managing partner at District Capital Management, advises investors to prioritize evaluating whether a company is fundamentally sound when selecting stocks to buy. By considering factors like profitability, return on equity, and revenue growth, we can determine if a company has a solid foundation for success.
In addition to strong business metrics, we also look for stocks that have received positive recommendations from Wall Street analysts. These endorsements indicate that industry experts believe in the company’s potential and have confidence in its future performance.
Moreover, we focus on stocks with a market capitalization of at least $50 million. Market capitalization is the total value of a company’s outstanding shares and is a good indicator of its size and stability. By choosing stocks with a significant market capitalization, we increase the likelihood of investing in well-established companies.
Lastly, we consider the forward earnings of these stocks, which should be below 14. Forward earnings are a projection of a company’s future profitability based on analysts’ estimates. By targeting stocks with forward earnings below 14, we aim to identify companies with reasonable valuations and growth potential.
By employing these criteria, we have identified a list of stocks priced at $10 or less that possess attractive business metrics, profitability, and long-term growth potential. These stocks are potentially undervalued opportunities that investors can explore for potential returns.
1. Assertio Holdings (ASRT)
Sector: Health care
Market cap: $405 million
Year to date return: 75%
Assertio Holdings is a healthcare company that focuses on producing branded prescription products for neurology, pain, and inflammation. They have seen positive sales growth, with their drug sales surpassing expectations. Their key products, Indocin for inflammation and Sympazan for seizures, have performed well. The company’s stock price has more than doubled in the past year, showing its positive momentum.
Pros:
1. A diversified drug portfolio lowers risk.
2. Strong sales growth in leading products.
3. The forward price-to-earnings (P/E) ratio was under 8 at the end of 2022, after a significant increase in stock value.
Cons:
1. Indocin, which contributes to over half of product sales, lacks patent protection.
2. Competition from generic alternatives for Cambia is expected in the near future.
3. The debt-to-equity ratio suggests potential risks regarding the company’s balance sheet.
In summary, Assertio Holdings has experienced significant growth due to its diversified drug portfolio and strong sales. However, the lack of patent protection for Indocin and the upcoming generic competition for Cambia pose challenges. The company’s debt-to-equity ratio also raises concerns about its financial stability.
In terms of valuation, the company’s price-to-earnings (P/E) ratio stands at 4.
2. CompoSecure (CMPO)
Sector: Industrials
Market cap: $564 million
Year-to-date (YTD) return: 53%
CompoSecure is an industrial company that specializes in designing and manufacturing high-quality financial cards. They also offer professional services to clients worldwide. Their patented metal card technology aims to enhance the experience of affluent credit card users, leading to increased customer spending and retention.
In the most recent quarter, CompoSecure showcased impressive growth numbers. They achieved a 17% year-over-year increase in net income and a remarkable 56% year-over-year growth in net sales. The company set new quarterly records with revenue of $103.3 million, up from $66.2 million the previous year, and earnings before interest, taxes, depreciation, and amortization (EBITDA) of $32.7 million, marking a 33% increase.
Pros:
1. Achieved record revenue and EBITDA despite a challenging macroeconomic environment.
2. The company has a relatively small float of 7.5 million shares and a high short interest of 1.3 million shares, potentially leading to a short squeeze.
3. CompoSecure benefits from the ongoing transition away from cash and check payments, positioning them favorably.
Cons:
1. Analysts project that earnings and revenue growth will significantly slow down in 2023.
2. Faces stiff competition from mobile and digital payment platforms.
3. The stock has declined since completing its special purpose acquisition company merger in December 2021.
In terms of valuation, the company’s price-to-earnings (P/E) ratio stands at 12.
In summary, CompoSecure has demonstrated impressive growth, achieving record revenue and EBITDA despite challenging market conditions. However, analysts anticipate a slowdown in earnings and revenue growth for the company in 2023. Additionally, CompoSecure faces strong competition from digital payment platforms. It is worth noting that the stock has experienced a decline since its special purpose acquisition company merger.
3. Garrett Motion (GTX)
Sector: Consumer cyclical
Market cap: $531 million
Year-to-date (YTD) return: 4%
Garrett Motion is a company that specializes in providing turbocharging, electric-boosting, and connected vehicle technologies and services for the automotive industry. In 2022, the company reported 8% revenue growth on a constant-currency basis, with a particularly strong fourth quarter showing 15% constant-currency net sales growth. Additionally, Garrett announced three new contracts with major global electric vehicle automakers to produce advanced fuel cell compressor products.
Garrett’s financial performance is solid, with $390 million in net profit in 2022. The company’s stock is also considered attractively valued at approximately 8.2 times forward earnings.
Pros:
1. The company is securing important contracts for next-generation electric vehicle technology, indicating potential growth opportunities.
2. Garrett Motion has significantly outperformed the S&P 500 index over the past year, demonstrating positive market performance.
3. Supply chain disruptions in the automotive industry could result in pent-up demand for vehicles in 2023.
Cons:
1. Garrett emerged from Chapter 11 bankruptcy in 2021, which may raise concerns about its financial stability.
2. There is limited analyst coverage of the company, which could limit the available information for investors.
3. Headwinds such as commodity, transportation, and energy inflation could impact the company’s operations.
In terms of valuation, the company’s price-to-earnings (P/E) ratio stands at 11.
In summary, Garrett Motion is a company with a strong presence in the automotive industry, securing significant contracts for electric vehicle technology. Despite emerging from bankruptcy, the company has demonstrated solid financial performance. However, limited analyst coverage and potential headwinds related to inflation may pose challenges.
4. Heritage Global (HGBL)
Sector: Financial services
Market cap: $111 million
Year-to-date (YTD) return: 25%
Heritage Global is a financial asset solutions company that specializes in facilitating industrial and financial asset liquidation transactions. They have two main divisions: the industrial assets unit, which deals with commercial inventories and machinery, and the financial assets unit, which handles financial portfolios ranging from performing to defaulted accounts.
In 2022, while many sectors faced challenges, the asset liquidation market experienced significant growth. Heritage Global reported record net operating income and achieved over 100% year-over-year revenue growth in the most recent quarter. As a result, the company’s stock price has surged by more than 170% in the past year, reflecting its strong performance.
Pros:
1. The company’s revenue more than doubled in the most recent quarter, indicating robust growth.
2. Heritage Global has delivered impressive five-year stock returns, surpassing 650%.
3. The company anticipates continued growth in nonperforming consumer loans in 2023, presenting further opportunities.
Cons:
1. Analysts project that sales growth will slow to 13.9% in 2023, potentially indicating a deceleration in momentum.
2. With a micro-market capitalization of $101.1 million, the company may have limited media and analyst visibility.
3. Total operating costs and expenses more than doubled in the third quarter, which could raise concerns about cost management.
Regarding valuation, the company’s price-to-earnings (P/E) ratio stands at 7.
In summary, Heritage Global has experienced significant growth, with record net operating income and substantial revenue growth. The company has delivered impressive long-term stock returns. However, analysts project a potential slowdown in sales growth for 2023. The company’s micro-market capitalization may limit media and analyst visibility, and the increase in operating costs and expenses warrants attention.
5. Vertex Energy (VTNR)
Sector: Energy
Market cap: $511 million
Year-to-date (YTD) return: 13%
VTNR, a budding energy transition company, emerged in the early 2000s with a strong presence along the Gulf Coast and went public in April 2009. It has since grown to become one of the largest processors of used motor oil in the United States, specializing in refining and marketing base oils and refined products.
VTNR boasts an attractive price-to-book (P/B) ratio of 4.22, which is significantly lower than its peers, indicating a favorable valuation. The Houston-based company recently completed a strategic acquisition from Royal Dutch Shell, acquiring an Alabama refining facility for a discounted price of $75 million. This acquisition enhances its position as a leading supplier in the region.
Pros:
1. Analysts anticipate sales growth of 26% for VTNR this year, signaling positive growth prospects.
2. The company’s shares have the potential to nearly double in value, reaching $15.
3. The acquisition of a key Gulf Coast refinery from Shell strengthens VTNR’s position in the market.
Cons:
1. The value of VTNR is partly driven by the acquired Shell refinery, which presents a reliance on this asset for growth.
2. There is a possibility that refineries, including VTNR, might be experiencing higher-than-usual earnings, potentially raising concerns about sustainability.
3. Negative sentiment towards energy stocks in general may impact VTNR’s performance.
In terms of valuation, the company’s price-to-earnings (P/E) ratio stands at 11.
In summary, VTNR has positioned itself as a prominent player in the energy transition sector, with a strong presence on the Gulf Coast. The company’s favorable valuation and the strategic acquisition from Shell bode well for its growth potential. However, reliance on the acquired refinery, potential concerns about overearning in the refining sector, and negative sentiment towards energy stocks are factors to consider.
Strategy
The selection process for identifying the best stocks under $10 involved the following criteria:
- Altimeter overall grade of B or higher: Stocks were evaluated based on their profitability, earning stability, valuation, and earning expectations. Companies with an overall grade of B or higher, ranking in the top quarter of Altimeter’s stock database, were considered. This suggests strong valuations and the potential for improved returns.
- Market capitalization of at least $50 million: stocks with a market capitalization below $50 million were excluded. This was done to avoid nanocap stocks, which are often highly volatile, have low trading volumes, and have limited liquidity. The selected stocks have a market capitalization of at least $50 million, providing a level of stability.
- Consensus analyst recommendation of “buy” or better: The stocks included in the list received a significant number of “buy” ratings from analysts. This indicates an expectation that the stocks will outperform the overall market. At least one “buy” rating from a Wall Street analyst was required, demonstrating professional confidence in those stocks.
- Forward earnings multiple of less than 14: The forward earnings multiple, based on analysts’ projected future earnings, was used to assess the stocks’ valuations. Stocks with a low forward earnings multiple (below 14) were considered attractively valued. This is in comparison to the median forward P/E ratio of 18.3 for the S&P 500, indicating favorable valuations for the selected stocks.
Why not other stocks?
Other stocks did not make the cut for several reasons. Just because a stock has a low share price does not automatically make it an attractive buying opportunity. The selection process aimed to identify good stocks priced at $10 or less, which are relatively rare. Many companies with low share prices often face challenges with their business models.
To assess the business fundamentals of the stocks, a screening process was conducted. This included evaluating the stocks’ earning power and profitability in relation to their asset base. The focus was on determining whether the companies were improving their earning power over time.
In conclusion, investing in stocks priced under $10 requires careful consideration. Many of these stocks are highly volatile and carry a high level of risk. However, there may be hidden gems among them that have the potential for significant long-term gains.
To mitigate the risks associated with investing in cheap stocks, it is advisable to diversify your portfolio rather than make large investments in one or two stocks. Diversification helps spread the risk and can enhance the overall stability of your investment strategy.
