"Size matters not," Star Wars' Yoda once famously said. "Judge me by my size, do you?"
Investors don't typically see eye-to-eye with the pint-sized Jedi master. Many market mavens view investments with small stock prices as something only risk-averse speculators should consider. It doesn't always have to be that way. There are plenty of stocks trading for less than $5 that are merely out of favor. Some are profitable. Some are growing. The risks are there, but the same can be said about the opportunities.
Rite Aid (NYSE:RAD), Glu Mobile (NASDAQ:GLUU), and Groupon (NASDAQ:GRPN) are three names that are currently trading in the low single digits. They are all seemingly not pinging on Mr. Market's radar, but there are catalysts in play that could send all three stocks higher in 2018. Let's go over why they may be among the top stocks under $5.
If you've ever wanted to see the market equivalent of Charlie Brown trying to kick the football before Lucy yanks it away at the last second, you'd probably find Rite Aid kicking up blades of grass before falling flat on the ground. Rite Aid had a sweetheart deal to be acquired by a larger drugstore chain for $17.2 billion in late 2015. Anti-trust regulators repeatedly shook their heads until the deal was whittled down to just 1,932 of its nearly 4,600 stores and three distribution centers for $4.375 billion.
Rite Aid could've used the cash to pay down its gargantuan debt and grow its smaller base of remaining locations, but last month, it announced it would be merging with privately held grocery store giant Albertsons. The terms of the deal didn't wow the market. Rite Aid investors can either swap 10 shares of Rite Aid for 1.079 shares of Albertsons, or go for a cash and stock combination of a single share and $1.83 in cash for those same 10 shares. There will be realized synergies for the deal that will make both Albertsons and Rite Aid stronger, and regulators are highly unlikely to get in the way this time.
Stocks trading in the single digits aren't all in the market's doghouse. Glu Mobile shares actually soared 88% last year and are trading marginally higher in 2018. The mobile game publisher lives and dies by hit releases. We saw the stock take off in the summer of 2014 when Kim Kardashian: Hollywood was a hot diversion, and lightning struck again last year as home-decorating simulator Design Home raced up the charts.
The release late last year of the Taylor Swift-backed The Swift Life isn't living up to the initial hype in terms of download activity, but Glu Mobile's pipeline is locked and loaded in 2018. It has spent the past year and a half streamlining its operations so it can push out more releases in a cost-efficient manner, and the guidance it initiated last month calls for bookings to grow yet again in 2018.
Daily deals and flash sales don't seem to have the same zing they used to, but that doesn't mean the niche leader is a shrinking violet. It's true that Groupon's revenue has declined for eight consecutive quarters, but a lot of that is mostly by design as the experience discounter scales back on low-margin product sales and profit-slurping international outposts.
Groupon may have fallen short of Wall Street's profit target in its latest quarter -- a rare miss on the bottom line -- but the real takeaway here is that Groupon posted positive earnings on an adjusted basis in each and every quarter of 2017. Last month's report was enough to drag the previously buoyant shares back below the $5 mark, but Groupon stock is still trading 60% higher since bottoming out last summer. Groupon's stateside audience continues to grow, and as it builds on last year's profitability and finds new ways to cash in on its growing base of local merchants, the future is brighter for Groupon than its low stock price seems to suggest.