Not all investors have a hoard of cash at the ready to buy stocks, so they search for companies with stocks trading at lower per-share prices. Done right, this approach makes sense for some. But investors should be aware that targeting cheap stocks comes with risks.
Companies with shares trading under $5 are most often small-cap and mid-cap stocks, which tend to be newer businesses with less diversification in how they operate and where their revenue comes from. As a result, they are disproportionately unprofitable, produce more volatile operating results, and have more volatile share prices.
Recent stock-trading rule changes have created an alternative, and many brokerage platforms now offer fractional shares, which allow investors to easily purchase a portion of a share of stocks or exchange-traded funds (ETF) with any level of funds (even less than $5). This has become a great option for diversification or as small purchases for investors who can't sink a large amount of capital into the stock market.
Still, stocks trading under $5 a share can be great for investors looking for under-the-radar opportunities or those who want to get in at the ground floor of a rapid growth story. Below are three of the more interesting ones on the stock market now.
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1. OPKO Health
Healthcare company OPKO Health (OPK 1.22%) operates a clinical testing segment and pharmaceutical business. It owns BioReference Laboratories, one of the largest diagnostic lab service providers in the U.S. and 29 other countries. The labs provide testing for a number of diseases and health issues, with an especially strong presence in oncology. OPKO also markets a drug called Rayaldee, which is used in the treatment of advanced kidney disease.
OKPO has not been profitable in the past decade, and it reported declining revenue in both 2018 and 2019. However, the company's trailing-12-month sales have grown to the highest level since 2016, and analysts are forecasting profitability for the full-year 2021. Rising sales have been driven by diagnostic testing related to COVID-19 and approvals of Rayaldee in several European countries. OPKO shares trade at a reasonable 30.3 forward P/E ratio and only 1.88 price-to-book, so this turnaround story has some room to appreciate if things continue to go well next year.
2. Antares Pharma
Specialty pharmaceutical company Antares Pharma (ATRS) focuses on drug delivery products such as injection instruments, oral tablets, and topical gels. These delivery technologies are meant to enhance the safety and efficacy of pharmaceutical products developed by other companies, especially in the areas of rheumatology, urology, endocrinology, and neurology.
Antares is a high-growth company that recently swung into profitability. Sales over the trailing 12 months are nearly triple the full-year-2017 value, and forecasts call for growth in excess of 25% next year. Xyoxsted and the generic EpiPen from partner Teva Pharmaceutical Industries are major drivers for growth and profitability in the near term. The delivery of profits is especially relevant for investors who have been skeptical about the ability of Antares' management to achieve earnings. Shares trade at a very attractive 14.1 forward P/E ratio, which is uncommon for a stock with this growth potential in the current market.
3. Fluent
Fluent Inc. (FLNT 2.05%) provides digital marketing and customer acquisition services to clients in numerous industries in the U.S. and abroad. The company has notched impressive growth in recent years, averaging nearly 15% expansion in sales since 2016. Despite the challenges related to economic disruptions from COVID-19, Fluent's third-quarter sales rose 21% year over year, with its media and entertainment segment providing an important catalyst for overall growth.
Importantly, Fluent is on track to achieve positive earnings for the first time in 2020. Valuation of growth companies is often complicated before they become profitable because most valuation methodologies depend on some form of earnings. It's not always clear whether a business model is simply unlikely to produce net profits, or if a company is shrewdly investing for future growth rather than taking profits. In this case, Fluent has shown that it's capable of generating positive net income at its current scale, and it is still in a period of impressive growth.
Fluent shares trade at a 13.7 forward P/E ratio, 14 enterprise-value-to-EBITDA, and 1.4 price-to-book. All of these valuation metrics are rather cheap, especially for a company with Fluent's projected growth.
