Stocks priced at less than $10 per share can be risky because they are often small-cap stocks, which are typically more volatile. They might also be shares of companies without earnings power or ones that plummeted due to bad management, macro shifts in their industry, or any number of reasons.
But sometimes there are good companies with strong growth potential sitting in this price range. Here are two that fit the bill.
LexinFintech Holdings
You may not be familiar with LexinFintech Holdings (LX 1.16%), probably because it's based in China and is relatively small, with a market cap of $1.4 billion. It's an online consumer finance company targeting educated young professionals ages 18 to 36. It offers customers a credit line and an accompanying virtual credit card, called Le Card, which they can use to buy merchandise on LexinFintech's e-commerce platform, Fenquile. Customers can also link the credit line to payment providers like Alipay and WeChat to make purchases outside the Fenquile platform.
Image source: Getty Images.
The company sees this group as potentially high earners with higher consumption needs who don't yet have the income to meet them and who also want to establish a credit history. Fenquile addresses these needs with a competitively priced array of goods and services. Since its launch in 2013, LexinFintech has seen a steady climb in users. In 2019, it originated 9.9 million loans, up from 4.9 million the previous year. About 81% of loan recipients, or users, were repeat customers.
The credit lines are funded by LexinFintech partners, about 100 different Chinese banks and financial institutions. The fintech earns a fee for matching borrowers to lenders as well as for facilitating the transaction with merchants on the e-commerce site. In addition, it puts up a small percentage of the loan -- about 5% to 10% -- as part of its loan guarantee service.
Last year was a difficult one due to the pandemic; the total value of transactions on the e-commerce site was down 37%. That, in turn, impacted LexinFintechʻs earnings, as net income fell 52% and gross profits were down 42% year over year.
The good news is that while people weren't spending, the number of loan originations increased 30% in the third quarter year over year, and the number of users with a credit line increased 51% to 25.2 million. Further, the company is on track to meet its loan origination projections for 2020 despite the pandemic, a 40% increase year over year.
In 2021, the company projects RMB 220 to RMB 230 in loan originations, up from RMB 176 billion at the end of 2020. Also, LexinFintech is moving away from providing loan guarantees and toward a pure service fee model, which reduces its risk.
With an improving economy at home and its niche focus on online consumer finance for an underserved market with few competitors, LexinFintech is in a great position to grow in 2021. In fact, it is already up nearly 12% year to date as of Wednesday's close.
Dynavax Technologies
Pharmaceutical company Dynavax Technologies (DVAX +0.00%) might have caught your attention on Jan. 25, when it vaulted about 25% to about $6.50 per share. News outlets reported that Dynavax and its partner, Medigen Vaccine Biologics, had announced that the first participant was dosed in the phase 2 clinical trial evaluating their COVID-19 vaccine candidate. Medigen provides the vaccine, while Dynavax provides the adjuvant, which enhances the bodyʻs immune response. It is the same adjuvant Dynavax uses in its FDA-approved hepatitis B vaccine, Heplisav.
While Dynavax is one of many pharmaceutical companies vying to make a COVID-19 vaccine, it is farther along than many, and some have even dropped out. But I see the outcome of the COVID-19 vaccine efforts as a potential bonus for investors. Even if the vaccine candidate doesn't come to market, Dynavax should generate strong earnings on its Heplisav vaccine for hepatitis B.
Heplisav was approved in 2017 and is coming off its best quarter ever, generating $11.6 million in revenue, up from $10.2 million from the year-ago period. This is despite the fact that overall, vaccinations were down due to the pandemic.
Dynavax increased its market share in the quarter to 23% and expects that to expand in the coming years, as Heplisav has some key competitive advantages. Heplisav is the only two-dose hepatitis B vaccine, and it requires only a month to take effect, as opposed to six months for the others. It has a strong potential to become the standard of care for the disease and disrupt the market.
The stock is currently up 38% year to date, and analysts predict a median $14-per-share price target over the next 12 months.
These two small-cap companies are at the beginning of their growth trajectories, so expect some volatility along the way. But both are positioned to be long-term gainers for investors.
