Stocks with low prices aren't on their face any different than those with high prices. You're still buying a share of a company, giving you a percentage ownership of future earnings, which in theory should drive the stock's value.
Realistically, most companies don't want to have single-digit stock prices. A low share price can make for a more volatile stock. This condition often arises from a stock falling from double digits down to the single-digit range, indicating some kind of weakness in the business.
But sometimes single-digit stocks recover. I think SunPower Corporation (SPWR +0.00%), Enphase Energy Inc. (ENPH +2.61%), and Vivint Solar Inc. (VSLR +0.00%) are worth the risk in the energy segment, while GoPro Inc. (GPRO 0.60%) and Fitbit Inc. (FIT +0.00%) have high potential in the consumer goods sector.
Image source: Getty Images.
Energy's disruptors
Solar energy has been a booming business in terms of installations but it has been very difficult for investors to make any money. Despite being among the leaders in their respective businesses, SunPower, Vivint Solar, and Enphase Energy have all struggled mightily from a stock-price standpoint.
SunPower, Vivint Solar, and Enphase Energy Stock Performance, data by YCharts.
The reason I think these three companies will turn around is that the industry has matured, weaker players have been pushed out, and these three have carved out valuable niches in their fields.
SunPower is the solar manufacturing industry's efficiency leader, producing solar panels that turn over 22% of the solar energy generated into electricity. The company has a clear advantage in the rooftop solar market, where high efficiency matters most, but it has struggled in utility-scale projects where it competes against commodity Chinese solar panels. As a result, it's been shedding assets and its project development business to simplify operations, a disruption that has hurt the stock price. But operations are turning around. In 2018, SunPower is still posting net losses, but adjusted EBITDA is expected to be between $75 million and $125 million and margins are steadily improving to the point where the company may be profitable by year-end. With a market cap of just $1.1 billion and a stock price below $10, this is a solar company worth betting on.
Vivint Solar is one of the top three residential solar installers in the U.S., which is valuable in and of itself. But it also has a tremendous amount of value just sitting on the balance sheet and that's why I think it's a great buy. According to management's calculations, even after pulling out debt, there's $6.78 per share of long-term retained value: i.e. the present value of future cash flows that are under contract. This doesn't include any future solar sales. So with shares trading at $5.60, there's some upside for investors even if ongoing operations are simply shut down and existing contracts are allowed to run off over the next 20 years.
Enphase Energy is the comeback kid of this group. The company was in dire straits early last year but it got a $10 million bailout from institutional investors to get its latest IQ 7 line of microinverters into the market. So far, they've been a success, with revenue up 27.8% in the first quarter of 2018 to $70.0 million and gross margin jumping from 12.9% a year ago to 26.2%. More growth is expected after the company acquired SunPower's microinverter business last month. The deal is expected to add $60 million to $70 million in annualized revenue at a 33% to 35% gross margin. Given the financial improvement of this solar supplier, I think it's a great bet for long-term investors.
Image source: Fitbit.
The embattled device makers
Despite serving different industries, Fitbit and GoPro have a lot in common. They sell devices to consumers that need constant refreshing and meet end-user demand.
Missteps in product design and inventory management have made both Fitbit and GoPro single-digit stocks. In GoPro's case, the company has never quite recovered from having made its product lineup too complicated ahead of the 2015 holiday season, which led to writedowns of excess inventory and ultimately financial losses. Fitbit has struggled with a shrinking activity tracker market and intense competition in smartwatches from the likes of Apple and Garmin.
The reason I think GoPro and Fitbit are ready to recover is that they've both become leaner companies than they were a few years ago. GoPro is now entirely focused on its "good, better, best" action camera strategy and the Fusion spherical camera. This focus has allowed GoPro to lower operating costs, which are now expected to be under $400 million in 2018, getting it close to breakeven. If GoPro doesn't go chasing new markets where it has very little competitive advantage (like past mistakes in drones and media), the company could rebuild its profitability in the future and recover nicely from its single-digit stock price today.
Fitbit has made similar mistakes with products that didn't inspire consumers, but it's moving away from the trackers that made it a popular brand and is growing in smartwatches. The new Fitbit Versa was its most successful smartwatch launch to date, according to management. If momentum continues in smartwatches, the company has a great brand to build on going forward.
Low price stocks that could be worth the risk
These are all high-risk stocks today, but if the companies overcome the challenges that made them single-digit stocks in the first place, they could be big winners for investors. That's why I'm adding outperform calls on SunPower, Vivint Solar, Enphase Energy, GoPro, and Fitbit on my CAPS page, betting they'll outperform the market over the long term.
