Cheap stocks can serve as high-reward plays for loyal investors. However, they also carry a high degree of risk. Stocks that fall below $5 per share usually suffer a loss of confidence from the Wall Street community. Very often, the market predicts the direction of these equities correctly, and they fall to $0.
However, a few cheap stocks manage to survive despite the negative sentiment. Others stage either temporary or permanent comebacks and deliver their shareholders phenomenal gains. For example, American Tower (NYSE:AMT) fell as low as 60 cents per share in 2002. Today, its most recent quarterly dividend amounted to 77 cents per share. Who wouldn’t want to get more than their original investment back in a single quarterly dividend payment?
Even a present-day mega-cap such as Bank of America (NYSE:BAC) has seen price levels this low.
While I cannot guarantee any current penny stock will see the same kind of recovery, I believe the following four cheap stocks will head higher in the near term.
Cheap Stocks to Buy: Chesapeake Energy (CHK)
Source: Chesapeake Energy
Admittedly, cheap stocks such as Chesapeake (NYSE:CHK) carry a great deal of risk. As a $3.9 billion company carrying $9.2 billion in long-term debt, Wall Street has long cast a wary eye on this natural gas giant. To be sure, this debt situation makes CHK stock risky. Should oil and gas prices crash, their profitability could disappear, again placing Chesapeake stock in danger of falling into bankruptcy.
The company continues to raise cash by selling assets. Also, despite the heavy burden of debt service payments, Chesapeake became profitable in 2017 and trades at a forward price-to-earnings (P/E) ratio of about 5.3.
Despite the valuation, few have wanted to buy this stock. While helpful in paying off debt, asset sales also tend to stunt profit growth. Depending on the forecast, profits could see modest movement in either direction over the next two years.
However, I also see a possible virtuous cycle forming. Debt reduction efforts have gradually repaired its heavily compromised balance sheet. Its debt has steadily fallen from the $11.1 billion level it reached when energy prices began to crash in 2014. As debt falls, more investors could come in, bidding up the stock price and eventually taking the stock’s market cap higher than its debt level. Such a move will bring the balance sheet and the company back to stability, pushing CHK stock much higher.
Time will tell if energy prices can remain high enough for this pattern to continue.
Cheap Stocks to Buy: Consumer Portfolio Services (CPSS)
Consumer Portfolio Services (NASDAQ:CPSS) operates in the business of subprime auto loans. The Las Vegas-based credit services firm has struggled since the 1990s as price spikes tend to give way to gradual price declines.
However, it looks like it could gain some traction in the near future. Revenues have risen by an average of 26% per year over the last five years. Also, profits, which have seen a decline over the previous few years, could start moving higher next year. Analysts forecast 22% profit growth for next year and an average of 20% profit growth per year over the next five years.
Despite the pending profit growth, CPSS stock trades at just over eight times forward earnings. With 20%-plus growth coming, that multiple should rise, and along with it, the stock.
However, even with the pending growth, investors should learn why CPSS remains listed among the cheap stocks. The stock spiked from under $1 per share in early 2012 to almost $12 per share by the spring of 2013. After this, it began a steady move downward until it fell to $3.20 per share early last month.
Now, the stock has begun moving upward. It currently trades at just under $4 per share. With growing profits, it can keep moving higher. Given the volatility of the subprime auto loan business and the history of CPSS stock, I would expect to treat this as a trade. Still, as long as the stock keeps moving higher, an investor could earn a quick profit with this equity.
Cheap Stocks to Buy: DHI Group (DHX)
DHI Group (NYSE:DHX) operates job boards. With sites such as Dice.com, eFinancialCareers.com, and others, it has attracted massive volumes of traffic from job seekers over the years.
However, since DHX stock peaked at $18.75 per share in 2011, it has seen a steady move downward as competition from the likes of Indeed, Glassdoor, and LinkedIn drive traffic away from DHI’s sites. Today, the stock trades at about $2.15 per share, making it one of the cheap stocks in this space. However, with profits of 19 cents per share expected for the year, that brings the PE ratio to 11.3.
Moreover, the company expects to see profits grow by 10.5% this year. It also expects 15.1% average growth over the next five years. Furthermore, companies struggle to fill positions as the labor market tightens. As a result, more employers will likely turn to DHI’s sites to help find suitable candidates.
Formidable competition likely explains the continued struggles of DHX stock. However, prospective buyers should pay attention to one overlooked multiple — its book value. The $115 market cap stands at only 0.81 times its $133 million in stockholders’ equity.
Although I remain concerned about competition, this stock appears cheap by any measure. Prospective buyers will not often find double-digit profit growth in an internet stock that trades below book value. The stock has achieved an average P/E ratio of 19.2 over the last five years.
While I do not predict it can regain its all-time high, I can see DHX stock moving higher, at least until the P/E returns to its average value.
Cheap Stocks to Buy: Valhi (VHI)
Source: Via LyondellBasell
Seldom does a conglomerate make a list of cheap stocks. However, Valhi (NYSE:VHI) specializes in a wide variety of activities. The Dallas-based firm supports divisions in chemicals, component products and real estate development and management. VHI stock has experienced a history where the stock would spike to higher levels only to come back down. The stock saw a spike last year from the low-$2-per-share range. It reached as high as $9.24 per share in April before coming back down again. However, it could be finding a bottom from which the stock could begin to rise again.
It trades close to $3.50 per share today.
After years of earnings declines, analysts expect to see earnings this year’s earnings rise by 257.9%. This earnings spike takes the forward P/E ratio to 5.1. Over the next five years, they expect annual earnings increase to average 25.5%. Since I do not expect the P/E to fall much further than that, I would expect the stock price to rise.
Furthermore, the stock has shown a history of massive moves higher. In May 2012, VHI stock increased in value by over sevenfold! More recently, it nearly tripled in value last fall. Given the growth in profits and the drop in the P/E ratio to fall to rock bottom levels, a similar move could happen again.
Like many of these stocks, history indicates that the buy and hold strategy has not worked for VHI stock. Each of these massive stocks higher resulted in an eventual fall to levels near their old lows. However, even if the equity follows this pattern once again, investors still have time to profit.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
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