Stocks can be cheap and expensive at the same time.
Novice investors might mistakenly think that a stock with a low share price is a bargain. However, some of these stocks are actually overpriced because their future prospects doesn't justify the current share price. Stocks with share prices below $10 in particular often deserve to be priced so low.
On the other hand, certain stocks can be both "cheap" and claim attractive valuations. The key to finding these stocks is examining their potential for future success. Here are three stocks from the healthcare industry with share prices below $10 that appear to be promising for investors with a long-term perspective.
Orasure Technologies (NASDAQ:OSUR)
Orasure develops diagnostic tests for HIV and hepatitis C virus (HCV) antibodies, solutions for testing drugs of abuse, and cryosurgical products. The Pennsylvania-based company also has a subsidiary, DNA Genotek, that makes DNA sample collection kits.
Why is Orasure's stock price well below $10? The company has yet to make a profit. Last year, Orasure lost over $4.6 million. But there are reasons to expect better results in the future.
Orasure's financial performance is improving. Revenue has steadily increased over the last few years and topped $106 million in 2014. Losses have declined over the past three years.
A couple of factors in particular could signal good things are on the way for Orasure. First, the company forged a strategic partnership with AbbVie last year to co-promote the OraQuick HCV test. This is a great fit with AbbVie's new hepatitis C drug now on the market. Second, Orasure is developing a test for the Ebola virus that is rapid and convenient. If the company's efforts are successful with this Ebola test, Orasure's days of bottom-line losses could be a thing of the past.
Orexigen Therapeutics (NASDAQ:OREX)
It's no secret that the U.S. has an obesity problem. Orexigen is one of a handful of companies that make prescription drugs that could help solve this problem. The company won regulatory approval for weight-loss drug Contrave in September 2014.
Orexigen's stock is still priced low because, like Orasure, the company is still losing money. However, that's perfectly understandable since Contrave gained approval relatively recently. Another concern for investors is that Orexigen must compete against two companies with weight-loss drugs on the market before Contrave -- Arena Pharmaceuticals and Vivus.
Prospects for Orexigen appear to be pretty good, though, despite the competition. The company secured European regulatory approval in late March. And a few weeks earlier, Orexigen reported interim data from its Light Study claiming that Contrave can actually improve cardiovascular outcomes.
Those two developments sent shares soaring more than 20%. Analysts think shares can go much higher. The average one-year price target for Orexigen reflects an increase of nearly 70% above the current price of the stock.
Pacific Biosciences of California (NASDAQ:PACB)
You won't find many fields more potentially revolutionary than genetic sequencing. Pacific Biosciences is one of the leaders in this growing industry. The company sells its PacBio RS II Sequencing System and related consumables to scientific organizations across the world.
Shares of Pacific Biosciences are priced below $10 largely because, like the two companies already mentioned, profits have yet to materialize. The good news for PacBio is that it is experiencing strong revenue growth -- from less than $2 million in 2010 to over $60 million last year. And its losses are on a downward trajectory.
One key challenge for PacBio, though, is to find a way to become profitable before its cash stockpile of just over $101 million runs out. The company must do so while facing a large successful rival in Illumina.
A real possibility for PacBio is that it gets scooped up by a major player. There has been plenty of speculation that Roche could decide to buy PacBio. The two companies have been partners since 2013. Roche made an attempt that same year to acquire Illumina but ultimately pulled the plug on the deal. I wouldn't be surprised to see Roche eventually become a white knight for PacBio -- with a price tag well above the small genetics company's current level.
All three of these healthcare stocks below $10 hold plenty of promise. Be aware of the risks associated with any of these stocks, however.
Orasure's Ebola test might flop. Orexigen could find racking up large sales of Contrave much more difficult than expected. Pacific Biosciences could run out of cash. There are plenty of other negative scenarios that could cause any or all of these companies to struggle.
Having said that, I think that overall, Orasure, Orexigen, and Pacific Biosciences offer a decent risk/reward proposition. If this view is on target, these cheap stocks might not be so cheap in the future.