If you're looking for cheap stocks, focusing too much on share price is a mistake. Even a company whose shares you can buy for under $5 can be expensive if its fundamental prospects aren't good enough to warrant that valuation.
But in some cases, stocks with low prices don't have any business staying cheap for very long. Companies like Zynga (ZNGA +0.00%), Chesapeake Energy (CHK +0.00%), and Ascena Retail Group (ASNA +0.00%) have mounted impressive comebacks over the past year, and the future could hold even further gains if the industry conditions that they face take a turn for the better.
|
Stock |
Share Price |
1-Year Price Change |
|---|---|---|
|
Zynga |
$4.17 |
9% |
|
Chesapeake Energy |
$4.61 |
21% |
|
Ascena Retail Group |
$4.21 |
141% |
Data source: Yahoo! Finance. Stock price as of Oct. 17, 11:30 am EDT.
Zynga's winning the game
Zynga is a giant in the online and mobile video-game world, with key offerings like FarmVille putting the company on the map. Video games have been an up-and-down business for Zynga over the years, though, and there were times it looked like the company would never be able to return to the optimism that surrounded the stock in the early 2010s.
A poster advertising FarmVille in a mall. Image source: Zynga.
Recently, though, Zynga has made all the right moves. During the summer, a smart licensing deal with Disney (DIS +0.52%) to come out with games based on the Star Wars franchise lit a fire under Zynga's stock, and hints that Zynga could be a takeover target have pushed shares even further up. With plenty of potential to keep serving a growing market no matter what happens on the mergers and acquisitions front, Zynga is in a great place for the first time in a long while.
Can Chesapeake get more energetic?
Energy stocks have been a mixed proposition in recent years, and Chesapeake Energy has had to make some nimble moves to try to stay in the most lucrative areas of the industry. Investors have liked Chesapeake's willingness to make key strategic decisions to focus on its most lucrative assets, rewarding the company with higher share prices following a July decision to sell off nonessential assets in the Utica Shale area.
Debt played a huge role in sending Chesapeake stock down from much higher levels into mid-single-digit territory, and so the energy company's efforts to pay down what it owes are encouraging for its long-term trajectory. Challenges remain, especially given the poor price action in the domestic natural gas market. But Chesapeake Energy sees opportunities in hot areas like the Powder River Basin as offering the ability to mount an impressive rebound and get itself fully back on track.
Victory in the retail wars
Finally, Ascena Retail Group has had to deal with tough conditions throughout the retail industry. Many retailers have had to shrink their store networks considerably, and major bankruptcies among some of the most respected names in the industry have become commonplace. Amid that backdrop, the parent company of Ann Taylor, Lane Bryant, and other well-known store brands had to work hard just to keep itself from moving in the wrong direction.
Now, Ascena has started to make real progress. Comparable-sales gains of 4% in the fiscal fourth quarter point to an important rebound in Ascena's retail performance, marking the first quarter in more than three years that the company saw gains. Despite ongoing struggles at dressbarn stores, other Ascena chains like the tween-focused Justice managed double-digit comp increases, helping to improve the overall bottom line. CEO David Jaffe recognizes that there's a lot more work to do, but for now, shareholders are enjoying the gains that Ascena has already made.
Pick the right stocks
Taking a flier on a low-priced stock without doing your homework can be costly. By focusing only on solid companies with good fundamental prospects, you'll be more likely to see big gains from your investments -- and less likely to end up just throwing away your hard-earned money.
