A low-price stock can be a sign that the underlying company isn't doing well. Maybe the stock has fallen over time, or sometimes high-risk companies have an IPO at low share prices to attract a broader range of investors. But low prices don't necessarily mean stocks are bad investments.
We asked three of our contributors for their favorite low-price stocks, and Aurora Cannabis (NASDAQ:ACB), Snap (NYSE:SNAP), and TerraForm Power (NASDAQ:TERP) made the top of the list for very different reasons. You'll find growth, value, and even a great dividend stock that investors can buy and hold for years.
A cannabis company worth owning
Todd Campbell (Aurora Cannabis): An aggressive M&A strategy that relied heavily on issuing ever-more stock has been a big headwind for the world's second-biggest publicly traded cannabis company, Aurora Cannabis.
Despite Aurora's annualized marijuana production of about 150,000 kilos per year that puts it in contention to become Canada's biggest pot stock, shares can be picked up for less than $9. The company's $8.9 billion market cap doesn't make this company cheap by any stretch, but given the size of the marijuana market, it's arguably still a bargain price tag if the industry lives up to expectations.
The worldwide marijuana market is valued at $150 billion, and estimates are that legal marijuana sales could eclipse $200 billion in about 15 years. Most of Aurora Cannabis' 65.1 million Canadian dollars in sales (up 305% year over year) last quarter came from Canada, but Canada itself represents a massive opportunity, given about CA$6 billion is spent there legally and illegally every year.
Aurora Cannabis' acquisition strategy has put it in an enviable position, with opportunities to serve big markets, including Germany, where medical marijuana sales began nationally in 2017. Assuming marijuana's legalization momentum doesn't fade, picking up Aurora Cannabis shares at these prices could prove savvy.
Up more than 100% -- but still below its IPO price
Leo Sun (Snap): Snap was once considered a doomed stock, as Snapchat's user growth decelerated and Facebook's Instagram cloned its most popular features. Nonetheless, the stock roughly doubled this year as the company's core growth metrics stabilized.
Snap stopped losing daily active users (DAUs) in the fourth quarter of 2018, and its DAUs rose 2% sequentially during the first quarter. Its revenue rose 39% annually during that quarter, as its average revenue per user (ARPU) climbed 39% and its total ad impressions surged 155%.
Therefore, Snapchat keeps squeezing more revenues out of its existing users to offset its slower user growth. Snap attributes that growth to its sales of more automated ads, the expansion of its platform with original shows and AR experiences, and a redesigned Android app, which is smaller, faster, and encourages developers to build new features. Snapchat also continues to be the most popular social network for teen users in America, according to Piper Jaffray.
Snap also reined in its spending, which narrowed its net loss to $310 million, compared to a loss of $386 million a year earlier. Its negative free cash flow (FCF) of $78 million also marked a significant improvement from a negative FCF of $268 million a year earlier.
Snap's recovery isn't guaranteed, but it could eventually achieve profitability if those metrics keep improving. If that happens, investors could flock back to this stock, which still remains well below its IPO price of $17.
Low price and high dividend
Travis Hoium (TerraForm Power): The price of a stock doesn't necessarily make it a good buy or not. But low-price stocks are often considered weaker than higher-price stocks, particularly if they've fallen dramatically from all-time highs, like TerraForm Power has. But that's one of the reasons this is a great stock to buy today.
What TerraForm Power does is buy renewable energy power-generating assets with long-term contracts to sell electricity to utilities and then uses the cash it generates to either pay down debt or pay dividends. It measures cash it can pay as dividends as cash available for distribution, keeping 15% to 20% of the cash to fund acquisitions.
Yieldcos like TerraForm Power haven't performed particularly well on the market the last few years, but the company is now controlled by Brookfield Asset Management, which has a long track record of success with yieldcos. The stability Brookfield brings comes in the form of financial backing and a stream of renewable energy assets that the company can buy to keep growing.
TerraForm Power's current price in the mid-13s shouldn't scare away investors, and they should love the 5.9% dividend yield. Not only is the dividend yield high, it's backed by projects that have an average of 13 years remaining on their off-take contracts, and current dividends aren't subject to taxes because they're a "return of capital." If you're looking for a stable dividend stock, TerraForm Power is a great pick, despite its low stock price.
Cheap stocks for every investor
Depending on the amount of risk investors want to take, Aurora Cannabis, Snap, and TerraForm Power offer something for everyone. And even though they're low-price stocks, they aren't as risky as investors might think.