The allure of penny stocks is that you can control a lot of shares for relatively little money, so that even small upward movements in the price can result in windfalls. That's the theory. But with that potential comes outsized risk -- the fact is, you're more likely to lose your capital in penny stocks than realize any gains. That's why investors should avoid buying them.
Low-priced stocks on the major exchanges offer some of the same allure. Usually a stock that seems cheap is cheap for a reason. But "usually" doesn't mean "always." Below are three stocks that trade around $10 a share. Although they've been knocked down for a reason, their business isn't broken -- and that means investors might be able to capitalize on the setbacks.
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Alcoa
Aluminum giant Alcoa (AA +0.00%) was trading around $12 a share at midday Friday. Alcoa's fortunes fluctuate because it is a commodity producer subject to the whims of pricing on bauxite, the primary mineral it mines to produce alumina, the precursor to making aluminum. Right now, there's a surplus of inventory and China dominates the market, which is why business has been soft and Alcoa's stock had been falling even before the COVID-19 pandemic. Yet Alcoa is streamlining its operations, making them more efficient, and looking to grow its market share.
Alcoa's stock has more than doubled from the lows it hit in March. Its recovery may be premature, as CEO Roy Harvey told analysts recently there was too much uncertainty to say we're on the edge of a recovery. So if you want to buy, know that we could still be early in the cycle. But the long-term outlook for aluminum -- and Alcoa -- remains strong, and that's the appropriate mindset and time frame for an investor.
Ruth's Hospitality Group
The restaurant industry might not seem like the best investment opportunity, but as state and local governments ease their pandemic shutdown orders, consumers are looking to go out for dinner again. Ruth's Hospitality Group (RUTH +0.00%), the owner of the the Ruth's Chris Steak House chain, could be one of those to see outsized gains.
While casual and family-style dining chains were ailing before the coronavirus outbreak, fine dining exhibited a level of immunity to the malaise. Black Box Intelligence reported earlier this year that fine dining and upscale casual chains were among the best performers that were able to also grow same-store sales before the shutdown orders became effective.
Ruth's was hit especially hard by the shutdown because it did not have a takeout or delivery option available, as fine dining is typically best experienced in the restaurant and not in styrofoam containers on your living-room floor. However, as consumers begin stepping back into their normal routines, Ruth's could be one of the beneficiaries. The stock, which was trading around $11 a share midday Friday, could eventually bounce back to its pre-pandemic highs of $25 a share.
Under Armour
Sports apparel maker Under Armour (UA +5.79%)(UAA +5.59%) was a troubled company before the pandemic, and its stock was in steady decline from the all-time highs it hit in 2016. The coronavirus outbreak really sent its price tumbling. But now, as retailers begin to open again, Under Armour could be on its way back.
One positive aspect of the coronavirus shutdown was the new emphasis on exercise. As a maker of athletic wear, Under Armour stands to gain due to this newfound or renewed interest in working out. It has opened almost half of its retail stores and will continue to open more going forward.
Under Armour does still rely heavily upon third-party retailers for the bulk of its business, and during the pandemic, consumers found the value in shopping online, which may continue even after shutdown orders have been lifted. Direct-to-consumer sales represent 34% of Under Armour's total revenue, with e-commerce sales accounting for less than half. The company has an opportunity to grow this avenue further and use the opportunity to break its dependence upon others.
