It's not hard to find stocks priced below $20 right now. The COVID-19 crisis hamstrung Wall Street as a whole in 2020, and there are lots of inexpensive stocks on the market even after the dramatic recovery we saw in May and June.
Luck favors the prepared, though. With great risk comes great potential returns. That being said, some low-priced stocks are trading at a discount for good reasons, and you need to avoid these landmines while searching for strong companies that will survive and thrive in 2021 and beyond.
On that note, here are three great companies trading at bargain bin share prices today. Let's take a closer look at consumer electronics veteran Sonos (SONO 1.13%), wireless modems designer Sierra Wireless (SWIR), and optical networking jack-of-all-trades Infinera (INFN 1.81%).
Sierra Wireless shares are trading at $9.34 per share today, and the company's market cap is below Sierra's total book value. In other words, investors largely feel like Sierra would bring them more value by selling off all its assets and returning that cash to shareholders than by continuing to operate the business.
This company is going through more changes than most in 2020. Under an agreement with activist investor group Lion Point Capital, Sierra dropped two directors and replaced them with four Lion Point nominees (and one additional member chosen by the current board) in April. Longtime CFO Dave McLennan retired the same day, replaced by former Motorola VP Samuel Cochrane. The leadership turmoil was followed by a disappointing first-quarter report in May.
Some might see that chain of events as a deal-breaking problem. Activist investors in the tech sector have a tendency to bring in handpicked boardroom nominees with more financial experience than technical expertise, usually aiming to sell the target company or break it apart into smaller pieces. That's not what I see here, though.
Lion Point's chosen board members come with high-level experience from reputable tech companies, including lots of experience in the semiconductor market. For example, Raj Talluri is currently the general manager of mobile business for memory-chip giant Micron Technology (MU 1.78%) and Jim Anderson is CEO of programmable logic specialist Lattice Semiconductor (LSCC 0.72%). I'm looking at high-quality thinkers with solid technical backgrounds. Their boardroom influence is not likely to result in a splashy buyout, but in a long-term focus on marketable semiconductor products. These guys know what's up in the chip sector.
I get why many investors are giving up on Sierra. At the same time, I can't wait to see how the beefed-up board of directors plans to improve the company's business prospects. I see a lot more upside opportunity than downside risk in buying Sierra Wireless stock today.
You can grab Infinera shares for $6 per share. The stock has nearly doubled in 52 weeks despite a 24% year-to-date drop.
The vertically integrated optical networking expert works in a cyclical market. The long-haul networking sector, which is Infinera's main watering hole, is due for a generational upgrade using faster endpoint modules. These faster fiber-optic modules will allow network operators to double or quadruple their service speeds, using the same optical fiber lines as before. The explosive combination of 5G wireless networks and Internet of Things devices will force many carriers to make these upgrades soon. Infinera is one of a mere handful of companies that can provide mass market quantities of next-generation optical modules today.
The COVID-19 pandemic threw a wrench in Infinera's immediate growth prospects, disrupting the company's supply chain and forcing many of its largest customers to pause their network upgrade programs. That's why Infinera's stock is trading lower in 2020.
Again, this is a cyclical stock. Infinera has seen downturns and market troughs before. The 5G-based upturn is delayed, not canceled. Infinera is either a huge rebound story waiting to happen or a tempting takeover target at today's low prices. As fellow Fool Leo Sun put it last month, "investors who give up on Infinera now could regret that decision in the near future."
One might think that Sonos would be thriving in the COVID-19 lockdown period, but the smart speaker specialist actually posted disappointing results in May's second quarter report. The stock has fallen 24% in 2020 due to that weak report, and shares are trading at $12 per stub.
Sonos is not worried about consumer-level demand for its products, which are in high demand these days. The soft sales stem from a brittle distribution network, relying heavily on attracting customer attention through hands-on listening stations in physical stores. The lockdown era obliterated that important sales driver, crushing Sonos' revenue growth and profitability in the second quarter.
Fortunately, Sonos' management treated that dramatic sales drop as a learning opportunity. On the earnings call, CEO Patrick Spence said that Sonos is looking at online sales channels in a whole new light now.
"I think the thing that we've learned is people are willing to purchase audio products in a big way online. So they're not having to listen necessarily as we go through it," he said. "We communicated a lot in terms of how Sonos could help in your home office. [...] And I hear from a lot of our customers, and I did not hear that we over-communicated."
Based on these expensive lessons, Sonos has revamped and ramped up its marketing efforts while taking a hard look at its distribution pipeline. The spring of COVID-19 will go down in Sonos history as an inflection point where the company started doing business in a better way. Revenue growth and solid bottom-line profits will follow. In turn, it's only a matter of time before Sonos stock starts to rise.