What makes a stock cheap? Well, there is a big difference between price and value. The best cheap stocks aren’t just cheap, they’re undervalued. In order to pick cheap stocks with potential, you need to learn how to evaluate a company. Cheap stocks have a low share price, but unvalued stocks have a low share price in comparison to the company’s true value.
Share price is the cost that you pay to purchase one share. However, share price is only one factor in determining the true value of a stock. Don’t make the incorrect assumption that you’re looking at a cheap stock because the shares are trading at a low price. In fact, looking at market capitalization (market-cap) tells us how the market values an entire company. In other words, market cap tells us how much the market thinks a company is worth.
To determine whether a company has a cheap stock, we need to start with the company’s market cap so we can understand how the market perceives its value. Market cap is determined by multiplying the share price by the number of outstanding shares. You can find this information in almost any stock quote.
Market Capitalization=(Share Price) x (No. of Outstanding Shares)
The most important metric in determining whether you’re buying a cheap stock is Price to Book (AKA Market to Book) Ratio. This figure shows a company’s total net assets in relation to the share price of its stock. P/B ratio is a figure that gets a lot of attention from value investors because its a good way to assess a company’s valuation. An inflated P/B ratio is a warning sign that screams that a stock is overpriced. In fact, many value investors use a P/B ratio of 3.0 as the maximum cutoff for viable investments. A company with a P/B ratio of less than 1.0 is considered an undervalued and very attractive investment. P/B ratio doesn’t include intangible assets like brand power and goodwill, so it’s not an end-all metric. However, it’s another tool you should have in your toolbox when you’re researching stocks.
P/B Ratio = (Market Price Per Share) / (Book Value per Share)
To get you started on your value investing journey, we’ve listed a few of our favorite undervalued stocks. These are some of the best cheap stocks on the market right now. These stocks can serve as examples to help you learn how to instinctually spot the best cheap stocks by looking at company financials.
Cheap Stocks to Buy Now
HC2 Holdings (NYSE: HCHC) – HC2 Holdings operates in the construction& engineering sector. They have a variety of revenue streams that come from construction, manufacturing, design, and more. This micro-cap stock has great valuation numbers. It has a P/B ratio of less than 1.0, so its book value per share is actually higher than its market price! The company has some debt issues, its long term debt to equity ratio is about 4.3, but it’s financially solvent (barely) with a current ratio of about 1.1. It’s not only undervalued; it’s also cheap. Shares are currently trading for less than $5.
Immersion Corporation ( NASD: IMMR ) – This company produces haptic technology that sends touch sensations to users engaging with digital products. This company has solid fundamentals and a favorable valuation, along with a P/B ratio of about 2.5. Share prices fell after an August 2018 earnings miss, and the stock is down over 50% from its all-time highs since then. However, Immersion has a current ratio of over 8.0 so the company isn’t in any immediate trouble. The management team has performed well, and the stock is currently trading for less than $10 per share.
Best Stocks to Buy Now
Micron ( NASD: MU ) – The semiconductor sector has started to make a comeback after getting beat down at the end of 2018. Shares of Micron were even trading at less than book value in December! The stock has rallied over 20% since then, but MU is still an attractive value investment. Its P/B is dirt cheap, at 1.29, and this is a company that delivered a 49% Return on Equity (ROE). Even with the recent rally, MU remains an attractive value investment.
FedEx ( NYSE: FDX ) – Shares of FedEx tanked last December when the company cited a “global slowdown” during the company’s Q3 earnings conference call. Shares have since rallied, along with the rest of the market, but the share price is meeting stiff resistance at around $180. The stock has had a downward bias since the sobering earnings call, but there’s nothing inherently wrong with this business. FedEx has a massive moat in terms of infrastructure and scale. Plus, it currently has a very favorable valuation with a P/B ratio of about 2.4.
Cheap Penny Stocks
Danaos Corporation (NYSE: DAC) – Danaos is a micro-cap shipping company that operates a fleet of 55 container ships in the U.S. and internationally, with a presence in Australia, Europe, and Asia. With a P/B ratio of less than 1.0 and a forward PE of 1.56, this company has great fundamentals. A favorable China deal could be the catalyst the stock needs to break out its current trading range. With over 58% of the company owned by insiders, management has a lot of skin in the game. Shares of DAC are currently trading for less than $1 per share.
China New Borun Corporation ( NYSE: BORN ) – This stock represents shares of a Chinese company that produces and distributes corn-based alcohol products. The company’s products are integral to the production of baijiu, a popular alcoholic beverage in China. Recently, New Borun Corp. shares suffered along with the rest of the Chinese stock market. However, share prices have begun to recover after the Chinese government announced a wave of economic stimulus programs. Fundamentally, the company is strong. It’s P/B ratio is shockingly low but there are no glaring problems that would validate such a low valuation. It’s currently trading at a price per earnings of less than 2.0 and it has a current ratio of about 2.6. Currently, shares are trading at around $1 per share.
The Bottom Line When it Comes to Cheap Stocks
Finding cheap stocks is the cornerstone of most value investing strategies. Value and growth investors are conflicting ideologies, but understanding the merits of each side of the argument is important. The best analysis often considers both technical and fundamental factors. At the very least, these tools will help you form your own ideas about a company’s valuation. Using these analysis principles will help you identify cheap stocks and find winning trades.