Some market participants base their entire strategy on cheap stocks. Now, this isn’t because they can’t afford to trade high-dollar stocks. Rather, cheap stocks provide more upside potential. For example, Monster Beverage Corp. (NASDAQ: MNST) was once a “cheap” stock and below $1 at one point. The stock is up over 10,000% from that price, and it’s sporting a market cap of over $20B. However, you can’t go out and just buy any cheap stock. Profitable speculation is dependent on sound risk management techniques. One thing stocks cannot do is go below $0. Cheap stocks provide lucrative opportunities and have little downside risk. That said, let’s take a look at why you should look for cheap stocks to buy, and some you might consider investing in.
Cheap Stocks Have High Upside Potential
Market participants look to cheap stocks due to their massive potential percentage returns. Cheap stocks tend to have larger percentage moves over the long term. This is attractive to those judged on percentage returns. Low-dollar stocks are also an attractive opportunity for those with “small” trading accounts.
For example, if you have an account with $5K and invest in 500 shares of a $2 stock, you would only be using 20% of your buying power. Now, what happens if this stock doubles or even triples? Well, your account would do the same. This is highly unlike with a $100 stock because it would eat at your capital. If you wanted to buy a $100 stock, you would use all your capital to purchase only 50 shares. Chances are the $100 stock is not going to double in a short period.
Best Cheap Stocks to Buy
Avon Products, Inc. (NYSE: AVP) manufactures and markets beauty- related products in Europe, the Middle East, Africa, South Latin America, North Latin America, and the Asia Pacific. AVP offers beauty products, including skincare products that include personal care products. Avon has a market cap of just under $1B.
This is important because it is a large enough company to prove it’s not a scam. However, AVP is small enough to be considered an acquisition target. When a company is in talks to be acquired by a larger company, the stock price rises with extreme volume. Consequently, sellers tend to disappear and the price continues to push higher. This can be a tremendous way to exit an investment with handsome profits.
Furthermore, AVP trades well over 3M shares each day. That means the stock is liquid enough for a market participant to trade as much of the stock as he wishes. AVP has a price-to-earnings ratio (P/E) of around 11. Investors use P/E to see how expensive the stock is relative to its peers. In this market, under 20 is considered “on sale.” That said, AVP would be considered a discount play.
LendingClub Corporation (NYSE: LC) operates as an online marketplace that connects borrowers and investors in the U.S. Its marketplace facilitates various types of loan products for consumers and small businesses. LC is an attractive buy due to its institutional ownership of over 90%.
Many investment funds own this liquid and cheap stock. LC traded as high as $25, meaning it has potential to reach this level again. The stock could even breach this level if there’s enough buying pressure. Over the past 4 years, LendingClub steadily increased sales from under $100M to over $1B.
Moreover, LC is heavily shorted. This creates a trap for bears, especially if good news comes across the wire. Positive company news brings new buyers to the table. Consequently, shorts have to cover their shares. In turn, this causes extreme buying pressure. Events like these could cause LC double in a short time.
MannKind Corporation (NASDAQ: MNKD) focuses on the discovery, development, and commercialization of therapeutic products for diabetes diseases in the U.S. Remember: high short interest could be a catalyst for cheap stocks. MNKD is a biotech company which causes this phenomenon to amplify. For example, if positive news about a new drug or medical breakthrough occurs, shorts will panic to cover. This scenario could cause over 100% moves in a short period.
MNKD already has an approved product. This means MannKind is not entirely speculative. Investors in this name support a company seeking to help diseased individuals. Some market participants pride themselves on this type of humanitarian investing approach. MNKD traded as high as $100 before, making it a deep discount at current levels.
New York REIT, Inc (NYSE: NYRT) focuses on acquiring commercial real estate and acquiring properties. Additionally, the company makes real estate investments related to office, retail, multi-family residential, industrial, and hotel property types located primarily in New York City. NYRT is an interesting cheap stock to buy now because it provides exposure to the real estate market. This stock trades under $5 and over 3M shares per day. Therefore, NYRT is a liquid way to speculate on real estate prices, or even for takeover speculation.
If an investor believes real estate, primarily in NYC, is undervalued, NYRT could be an excellent vehicle to profit from the idea. NYRT’s sales increased over the past few years, showing 10x more revenue than 4 years ago. NYRT shows over 80% institutional ownership, proving it has a high degree of big bank involvement.
Are Cheap Stocks Right For You?
Market participants with small account sizes should consider buying cheap stocks. Their inherent risk limits are important for growing account sizes. Percentage returns in cheap stocks cannot be replicated by higher priced names. Many of these companies will trade in tight ranges on normal trading days. However, when news hits, or new products come to market, these stocks take off into the stratosphere.
Cheap stocks can be thought of as a call option with “infinite” life. They don’t expire but still allow for incredible percentage returns. The cheap stocks to buy list above could be enough for an investor to get in and out easily. These cheap stocks to buy are highly liquid and could have extreme moves to the upside. Whether it’s a biotech or a beauty product manufacturer, cheap stocks could be the best way to make 2 and 3 times your money with controlled risk.