Everybody loves a cheap stock. Everybody loves a popular stock -- one with great name recognition.
Problem is, popular stocks are by definition stocks that attract a lot of attention from buyers, and that tends to drive the price up -- making it hard to buy them on the cheap. Perversely, your best chance of getting a cheap price on a high-profile stock may not come until it's made a high-profile stumble, causing its stock price to tumble.
And that's what has happened to shares of Zynga (ZNGA), Groupon (GRPN 0.57%), and Yamana Gold (AUY) -- our three featured stocks today.
Looking for a good opportunity to buy stocks that cost under $5? We've found 3. Image source: Getty Images
Zynga
Today we begin our search for bargain stocks at the far end of the alphabet. Once upon a time, Zynga stock was marketed as a way to invest in Facebook before Facebook itself went public. The maker of such popular social games as FarmVille and Words with Friends, mostly played via Facebook (and incessantly promoted on Facebook by their players) at the time, Zynga was seen as a way to profit from the social network's popularity even if Facebook itself never actually went public.
Problem was, Zynga was just a bit too reliant on Facebook for its revenue, and as the latter began to distance itself from the former, and the former's games lost some of their initial appeal, Zynga's popularity as a stock began to wane. (Obviously, Facebook's own IPO also removed a key reason for wanting to own a stock only corollary to Facebook's success.)
Today, this all leaves Zynga stock selling for a sub-$5 stock price ($2.79 to be exact) and $0.12 per share of losses last year. But not all is lost. While "unprofitable" from one perspective, Zynga generated nearly $50 million in cash profit last year, pushing its bank account up to $852 million in net cash. The stock's enterprise value of $1.5 billion is only about 30 times annual free cash flow and, with analysts projecting a 21% long-term growth rate for Zynga, it's not too hard to see how the stock could be worth buying again pretty soon.
Groupon
The story is similar with Groupon, the internet "deals" website that offered itself up as somewhat esoteric play on social networking when it went public in 2011. Like Zynga, Groupon found a gaping hole in its business plan when shoppers grew bored with its incessant parade of emailed deals -- and vendors got tired of selling their goods and services at steep discounts, only to find that deal-seeking customers were not the sort to demonstrate a lot of brand loyalty, and stick around when prices returned to normal.
Today, a share of Groupon stock won't set you back much more than a share of Zynga -- about $3.92. Groupon as a whole is also of similar size to Zynga, with a $2.2 billion market cap and a big bank account that drops its enterprise value to about $1.6 billion. Its free cash flow is also similar to its internet economy pal -- about $48 million per year.
What sets Groupon apart from Zynga is that analysts are less optimistic about its growth rate, predicting Groupon will grow no faster than 13% annually over the next five years. Relative to the stock's enterprise value-to-free cash flow ratio of 33, this makes Groupon a less attractive stock than Zynga -- even if it does cost under $5 a share.
Next stock, please.
Yamana Gold
Finally, we come to Yamana Gold, a longtime favorite here at The Motley Fool and potentially the shiniest hunk of rock in this bargain-priced bunch. Priced at just $2.75 per share, Yamana boasts a $2.6 billion market capitalization, making this gold miner seem not much more expensive than the e-economy stocks discussed above. It actually is quite a bit more expensive when you factor in a net debt load of $1.5 billion, giving it an enterprise value of $4.1 billion. But here's the thing:
Yamana Gold generates more free cash flow than Zynga and Groupon combined. Last year, cash profits at the company approached $170 million, and while free cash at Yamana tends to bounce around a lot. By 2019, for example, analysts who follow the stock believe that free cash could be flowing nearly twice as fast as what we saw last year. Data from S&P Global Market Intelligence suggest fiscal 2019 free cash flow could approach $320 million.
Admittedly, that figure is subject to change, and depends largely on the global price of gold. Gold prices closed out 2016 at about $1,145 per ounce, but are already up nearly 9% so far this year. The higher they climb, the better that will be for Yamana Gold's stock price -- and maybe even good enough to get it selling for more than $5 again.
