Just one Alexander Hamilton will nab you a share -- or more -- of one of these companies. Photo: Eli Christman, via Flickr.
Let's get one thing straight before I even get started: though it might seem more tempting to buy 100 shares of a company for only $10 apiece, that's absolutely the exact same thing as buying one share of a company that trades for $1,000. If either of these two stocks goes up or down by 10% in a year, you're left with the same amount of money.
That being said, there are literally thousands of stocks to choose from on the stock market; when we narrow down our choices to those trading for less than $10, it makes our task of choosing a stock that much easier.
When I look for great investments, three things stand out: financial fortitude, a sustainable competitive advantage, and a reasonable price. Read below to see how both of these stocks under $10 meet these criteria.
Hertz Global (HTZ +0.00%)
The global brands of Hertz. Photo: Hertz
Trading a just a hair under $10 per share, Hertz is our first stock to consider. Let's look at the company through the three broad lenses I discussed above.
Financial fortitude
As far as financial fortitude goes, the headline numbers might not look great to most investors.
|
Cash |
Debt |
Net Income |
Free Cash Flow |
|---|---|---|---|
|
$486 M |
$15.9 B |
$273 M |
N/A |
Source: SEC filings
With debt outpacing cash almost 30-to-1, I wouldn't blame most investors for shying away from Hertz. But there are three special circumstances that one needs consider before writing Hertz off. First, the car rental industry is very capital intensive. While that hurts on the balance sheet, it also provides a barrier to entry for competitors (more on that below).
Second, Hertz is actively slashing $300 million from its operating budget, and will get even more breathing room when it spins off its equipment rental business -- expected to occur in mid-2016. But perhaps most importantly, the company has been spending lots of money buying back shares. The current share count is 8.6% lower than it was just two years ago. That means a boost to EPS of over 9%!
Sustainable competitive advantages
In the car rental market, Hertz, Avis (CAR 4.32%), and Enterprise own almost 95% of the domestic business. When you're in an industry that's as capital intensive as these three, such market share means everything.
The elephant in the room is the role that either (1) Uber or (2) driverless cars could play in the future of car rentals. With the former, I believe the fears are largely overblown: Uber is disruptive to the taxi business, but in no way tries to mimic what car rentals are used for -- long-term use of a car at one's whim, often to travel long distances.
As far as driverless cars go, I don't see how this changes anything. Car rentals are needed most often when one is traveling. That won't change if there are driverless cars -- it will simply change who is actually driving the car.
Valuation
There are lots of ways to measure valuation. Currently, Hertz trades for just nine times expected 2016 earnings, and just 7.5 times expected 2017 earnings. Those are both very low price tags, especially for a company that's part of a well-entrenched oligopoly.
TrueCar (TRUE +0.00%)
Photo: TrueCar
Yes, this company has seen better days. After posting disappointing numbers and losing its founder/CEO Scott Painter, shares of the auto-buying company are down almost 80% from their all-time highs. But that may be the opportunity that you've been waiting for.
Financial fortitude
Though the company has stumbled, it maintains a solid balance sheet.
|
Cash |
Debt |
Net Income |
Free Cash Flow |
|---|---|---|---|
|
$112 M |
$0 |
($64 M) |
N/A |
Source: SEC filings
While the company isn't yet pumping out a profit or free cash flow, we can forgive it: TrueCar is still a very young company. What's important is that it has over $100 million in cash on hand, no debt, and a very capital-light business model, making it nimble in times of crisis.
Sustainable competitive advantage
As fellow Fool Daniel Miller recently pointed out, TrueCar is in a tough situation: the middleman between car dealers and customers. Currently there's no sustainable competitive advantage to speak of.
But with new CEO Chip Perry's pledge to fix relationships with the network of car dealers, TrueCar could soon benefit from the mother of all competitive advantages: the network effect. With each additional customer using TrueCar, dealers will have more motivation to join the dealer network, which will motivate more car-buyers to join, and so on.
The potential is enormous, but definitely not yet realized.
Valuation
So why would you pay for a stock when its advantages aren't yet guaranteed? For one, the stock is cheap. As I said, shares are 80% lower than their all-time highs. And though the company isn't expected to be profitable until 2018, it is trading for just 32 times 2018 earnings, and 22 times 2019 expected earnings.
That's a long way off, but if TrueCar's new CEO is able to repair relationships with its dealer network, and the network effect sets in, this stock might not be included in the "under $10" headline much longer.
So there you have it: two car companies, both trading for under $10, that could look like steals 10 years from now. There's no way of knowing if that's what will actually happen, which is why I'd urge you to look at our special free report below to expand your investing options, and make saving for retirement all the easier.
