It's just like the old idiom says: "Good things come in small packages."
Stocks with a very low share price (usually $5 and under) are often cast aside by investors as being far too risky. In some instances, investment firms and hedge funds will refrain from buying or owning stock in a company whose share price has fallen below $5. For companies with very small market caps, their low share price is often reflective of business uncertainty and/or ongoing losses.
However, in other instances, a low share price could represent an intriguing bargain.
With this in mind, I set out to find as many intriguing investment opportunities as I could in stocks with share prices of $4 or less and market caps of at least $300 million (in order to whittle out the truly risky stocks). Of the roughly six dozen companies that remained, four stood out as stocks under $4 that have decent chances to double.
Yamana Gold Inc.
Though all stocks have risks, arguably the "safest" of the four here is gold miner Yamana Gold (AUY). Yamana also has a respectable valuation of $3.4 billion, which serves as a good reminder that share price isn't a good indicator of a stock's "worth."
Yamana has been a bit of an oddball in the gold mining industry. It's been aggressively proceeding with projects while most of its peers have been pulling back on capital expenditures. Though it was a bit of a risky strategy with gold prices falling between 2013 and 2015, it's paying off now that gold has found its footing.
Looking ahead, 2018 and 2019 are expected to be big years of production growth for Yamana Gold. The company's C1 Santa Luz and Cerro Moro mines are expected to begin commercial production in 2018, with Santa Luz producing 130,000 ounces of gold in its first year and an average of 114,000 ounces of gold over the first seven years of production, while Cerro Moro kicks in an average of 130,000 ounces annually. Additionally, the Suruca development of the Chapada mine is expected to add 45,000 to 60,000 ounces of gold annually by 2019, with production expected to last four to five years. Lastly, the recently acquired Riacho dos Machados mine is forecast to expand production from 55,000 ounces in 2016 to 100,000 in short order.
On top of rapid production growth, Yamana can fall back on its byproduct (silver and copper) prodution to help offset its gold-mining costs. These byproducts have traditionally made Yamana one of the lowest-cost gold miners. Based on its preliminary 2016 production results, the company produced gold at an all-in sustaining cost of $914 an ounce.
With Wall Street estimating $0.90 per share in cash flow for fiscal 2019, and most gold miners being valued at roughly 10 times cash flow per share, Yamana could double in value and still be considered a good value.
On the riskier side of the equation -- and in the biotechnology industry -- is Geron (GERN 0.23%), a wholly clinical-stage company that's focused on the development of one drug: imetelstat. The obvious risk here is that if imetelstat fails to perform as expected in clinical trials for two types of cancer (myelofibrosis and myelodysplastic syndromes), Geron's valuation would be eviscerated to just what it holds in cash on its balance sheet.
So why Geron if the risks are so pronounced? During early stage studies in myelofibrosis, imetelstat demonstrated partial and complete responses in patients, which is something that had never been seen before in clinical studies. The only drug currently approved to treat myelofibrosis is Incyte's (INCY -0.37%) Jakafi. Jakafi doesn't target the root causes of myelofibrosis – it only treats the symptoms associated with the disease, such as an enlarged spleen and anemia. If imetelstat were to wow in clinical studies, it would have a real chance to displace Incyte's Jakafi, which could generate around $1 billion in sales in 2017.
The other big catalyst is Geron's development partner Johnson & Johnson (JNJ -1.56%). No company is perfect, but Johnson & Johnson has an exceptional track record of finding first-in-class therapies to help develop. Geron wound up receiving $35 million upfront from Johnson & Johnson, and it stands to receive as much as $900 million in development, regulatory, and sales-based milestones if imetelstat continues its development. If imetelstat succeeds in clinical studies, Geron will have a marketing stud in its corner.
Midstage data on imetelstat in the IMbark and IMerge studies will be released later this year, so Geron's shareholders should have a much better idea where things stand soon. Imetelstat's success in the myelofibrosis study could mean a quick doubling in Geron's share price.
Genworth Financial Inc.
Just as Yamana Gold represents the "safest" of the four, long-term care insurance provider Genworth Financial (GNW 0.17%) could rightly be called the riskiest. But just because it comes with added risks doesn't mean its valuation can't double from current levels.
Genworth Financial's risk stems from an inadequate amount of life insurance cash reserves, as well as an impending debt maturity in 2018 of $600 million. Even if Genworth manages to pay its 2018 debt obligation, it has other large debt obligations upcoming in 2020 and 2021. In terms of cash reserves, Genworth has already committed $175 million to its U.S. life insurance business, but this figure is still inadequate by more than a half-billion dollars.
Now here's the catch: on Oct. 23, 2016, Genworth agreed to be acquired for $2.7 billion, or $5.43 per share, in an all-cash transaction by China Oceanwide. China Oceanwide agreed to provide Genworth $600 million to cover its 2018 debt maturity, as well as add $525 million to bolster its cash reserves for the U.S. life insurance business. Based on Genworth's current share price of $3.39, the $5.43 offer represents an arbitrage opportunity of 60%, assuming the deal closes.
However, there's a reason there's such a wide gap between Genworth's current share price and the offer price: Wall Street expects shareholders to reject the takeover offer during the March 7 vote. Genworth has a book value of more than $25 per share, so it seems unlikely that shareholders would allow Genworth to be acquired so cheaply. On the flipside, Genworth is probably in need of assistance to bolster its balance sheet, and can't command too much of a premium.
In my opinion, it wouldn't be out of the question that China Oceanwide is coerced to raise its bid to $7 or higher to acquire Genworth with the support of shareholders. If it were to do so, Genworth could double from its current price. It's an exceptionally risky proposition given Genworth's capital needs, but outside interest in Genworth also remains possible.
Great Panther Silver Ltd.
Finally, we'll circle back to the industry where we began, precious-metal miners, by taking a closer look at Great Panther Silver (GPL), a company clinging to a $2 share price.
By all accounts, Great Panther Silver is a small player in the silver-mining space. It has just two producing mines: the Guanajuato Mine Complex, which generates around three-quarters of its production, and the Topia mine, which makes up the remaining 25%. Despite just two mines in commercial production, Great Panther Silver's prudent capital spending and expansion efforts have paid off, and then some. Between 2011 and 2016, silver equivalent ounce (SEO) production grew from 2.2 million ounces to a preliminary 3.88 million SEO, as reported last month.
Interestingly enough, SEO production actually fell 7% year-over-year in 2016, even with record gold production for a second consecutive year. Great Panther blamed lower ore grades at San Ignacio (its most profitable mine within the Guanajuato Mine Complex) and a shutdown at Topia for weaker silver production results. But in spite of the setback, Great Panther has some major production-boosting projects on the horizon.
The San Igancio mine, for instance, is expected to be a major source of expansion. Initial drilling finds from the Southeast of the mine suggest substantially higher ore grades, which, when combined with higher milling throughput, should yield more in annual silver production.
Also, in December Great Panther Silver agreed to acquire the Coricancha mine in Peru from Nyrstar for $100,000 up front and up to $10 million in earn-out consideration. The mine contains gold, silver, lead, zinc, and copper, and has a throughput rate of about 600 tons per day. Best of all, because Great Panther Silver has no debt, a deal like this can be financed without any worries on the part of management or investors. With Great Panther Silver finding new and innovative ways to grow its annual production, it looks to be a stock under $4 that could double.