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All Contents © 2017The Kiplinger Washington Editors
By Jeff Reeves
| December 2016
As the market continues to power higher and touches new record highs almost every week, it’s increasingly difficult to find cheap stocks to buy now.
That goes for both price — as many stocks have moved significantly higher on a per-share basis — as well as valuation. Right now, the typical price-to-earnings ratio of an S&P 500 company is about 18 times forward estimates.
However, as the old saying goes, it’s a market of stocks and not just a stock market. There are plenty of opportunities for value if you know where to look. And that means putting together a list of the best cheap stocks to buy now requires looking into some rather unloved or undiscovered corners of the market.
Some of these stocks are great investing ideas that aren’t yet popular because the companies are too small and risky. Others are battered after a period of rough sales or profits, but are now turning around and poised to bounce back. But each one of these 10 picks all share one trait — a super-low share price under $10.
At least, for now. Many of these picks move fast, so check out these cheap stocks ASAP before they move into double digits and beyond.
This slide show is from InvestorPlace, not the Kiplinger editorial staff.
Industry: Medical devices
Stock price: ~$10
Market cap: $380 million
YTD performance: 200%
While Lantheus Holdings Inc. is currently a shade under $10, don’t expect it to stay there for very long. The stock has been rocketing higher in 2016, it’s trading near all-time highs and it could push into double digits soon thanks to strong upside momentum.
This medical imaging and diagnostic company may be small, but it’s starting to discover consistent quarterly profits and is growing nicely. Non-GAAP earnings are expected to bloom from 57 cents to 67 cents per share in the current year (17% growth) and 79 cents in the next fiscal year (another 18% growth).
Wall Street is very optimistic, too, with RBC recently raising its target to $12 — at least 20% higher from here — just a couple months after Jefferies did the same.
Additionally, if you’re worried that some of the market momentum might not last in the new year, remember that medical imaging and testing is a pretty recession-proof business. So even if consumers cut back in 2017, Lantheus should continue to prosper.
Don’t delay in buying LNTH. This pick will soon go from one of the best cheap stocks to buy under $10 to a much higher-priced pick!
Industry: Video systems
Stock price: ~$5
Market cap: $425 million
YTD performance: 24%
Harmonic Inc. is a video and audio systems company that helps digital media companies and traditional broadcast outlets process and produce their content. In the 20th century, we saw print under pressure as words went digital on the internet. But now we are seeing further digital disruption as podcasts and streaming video are the norm.
That’s a great tailwind for Harmonic to ride, and its performance this year reflects that trend.
HLIT is still struggling to reach profitability, though it’s making progress in non-GAAP earnings. On that front, the trajectory clearly is higher; adjusted profits are set to expand from just 4 cents according to this year’s estimates to 32 cents next year — an almost 9x growth rate in profits! The top line is also growing at a nice double-digit rate, too.
Media tech can be a tough business, but a focus on video will help Harmonic keep ahead of the curve.
Stock price: ~$7.50
Market cap: $1.7 billion
YTD performance: 375%
Cliffs Natural Resources Inc. is no stranger to volatility. After bankruptcy fears dissipated earlier this year, I called out CLF as one of the best cheap stocks to buy in April when it was around $4 a share. Now, it’s over $7 a share and climbing — and still one of your best bets under $10 on Wall Street.
That’s because the election of Donald Trump as president means the hurt on commodity stocks like Cliffs has a big chance of lifting, and investors are piling in on the hopes of looser regulations and brighter days ahead.
When you couple this short-term sentiment with the longer-term proof of a turnaround for Cliffs, it adds up to big potential going forward.
Stock price: ~$7
Market cap: $460 million
YTD performance: 75%
Kratos Defense & Security Solutions, Inc. is, as the name implies, a contractor that offers defense and security solutions for the government and private companies. This includes everything from cybersecurity and video surveillance to guided munitions and drones.
I won’t moralize about the state of the world today and the threat from hackers in Russia or terrorists in the ranks of ISIS. However, it’s safe to say that defense and security are a growth business right now, particularly in the areas of cybersecurity and unmanned combat systems. Kratos is a smaller company, but one that’s at the center of those trends.
Shares are up impressively in 2016, and while KTOS has struggled to achieve consistent quarterly profits, it is on track to post its first full-year profit in fiscal 2017. That means the time is right to get in, before Kratos moves even higher.
Technology storage devices
Stock price: ~$8.50
Market cap: $750 million
YTD performance: -7%
Nimble Storage Inc. is a computing storage stock that crashed hard in late 2015 on a big earnings miss. But after a one-day decline of almost 50%, shares have stabilized and have bounced around between $7 and $10 or so since mid-2016. We’re around the middle of that range now, and I think it’s time for another move higher based on strong momentum since recent lows in early November.
Furthermore, while this data storage startup isn’t yet profitable, earnings are improving with a net loss of just 72 cents projected in FY2017 compared with the admittedly disappointing $1.52 loss recorded in FY2016 (which has already ended).
If you’re looking for a swing trade — particularly if you expect investors to go more risk-on in the months ahead and favor tech stocks like this cloud player — NMBL is one of the best cheap stocks to buy now.
Industry: Consumer lending
Stock price: ~$6.50
Market cap: $2.6 billion
YTD performance: -43%
LendingClub Corp. is one of the most aggressive picks on this list of the best cheap stocks to buy now. The peer-to-peer lending marketplace operator has been battered in 2016 and is down an ugly 75% from its late 2014 IPO, as it has struggled mightily to turn a profit.
There are good reasons for this. The peer-to-peer lending space has been more crowded than LC had expected and the growth, and profitability in the space has been less impressive than LendingClub had hoped for. And there are good reasons to be skeptical that this will change in 2017.
However, Wall Street is estimating that Lending Club will grow its revenue by 12% this year and another 20% next year with a good chance of operating in the black 12 months from now.
LC stock has the potential to be one of those “disruptors” you hear so much about. But clearly, there is also a lot of risk here, so don’t invest in this cheap stock if you don’t have the ability to weather some serious volatility.
Stock price: ~8.50
Market cap: $46 billion
YTD performance: 75%
Brazil was in pretty bad shape a year ago, with political scandal and one of the worst recessions in a century wracking the region. However, investors seem to think the worst is over, that brighter days are ahead, and that companies in the region are starting to look up.
This bodes extremely well, then, for major Brazilian bank Banco Bradesco SA.
Not only has BBD outperformed other stocks in the region year-to-date, but it also is well-positioned to continue its success in the new year. After all, the large-cap bank is a big source of financing for businesses and consumers in the nation, and as Brazil bounces back, that naturally will mean more loan activity — and profits — for Banco Bradesco.
Yes, emerging-market investments can be volatile. But the sun seems to be breaking through the clouds in Brazil. And besides, a bargain price-to-earnings ratio of 9 and a reasonable price-to-book ratio of just 1.5 sweetens the deal a bit — as does the 2.6% yield.
BBD is one of the best cheap stocks to buy now, particularly for investors looking for a global bent to their portfolio.
Industry: Food processing
Market cap: $640 million
YTD performance: 4%
SunOpta, Inc. is a specialty foods company that focuses on packaged foods as well as “field-to-table” raw materials including organic and non-GMO grains for other consumer staples companies to use in their finished product.
If you’ve taken a stroll down the grocery aisle recently, surely you’ve seen the focus on things like gluten-free foods and organic edibles. That means SunOpta is in the perfect position to capitalize on healthier eating habits among American consumers.
This cheap stock is one of the smaller ones on the list, with just a $600 million-plus market cap, so there is assuredly risk in this aggressive play. But investors should be encouraged by sales that are projected to improve by 22% this fiscal year and another 8% next year. Furthermore, earnings should surge from a projected 26 cents per share this year to 39 cents in FY2017 if projections hold.
SunOpta might not be a pick to hold forever, since there is a lot of competition in the space. But this is one of the best cheap stocks to buy right now thanks to its medium-term growth prospects and the potential of a buyout from one of the bigger players.
Industry: For-profit education
Stock price: ~ $9.20
Market cap: $630 million
YTD performance: 155%
When it comes to for-profit education stocks, investors have a lot to be skeptical about. But keep in mind that while the Obama administration and Department of Education inflicted pain on ed companies in 2016 — including the now-defunct ITT Educational Services, Inc. — there is actually a difference between the “diploma mills” in the for-profit ed space and legitimate players like Career Education Corp.
Career Education Corp. is less aggressive in its marketing, has requirements like a 2.0 GPA for any graduate school applicants and is more focused on vocational training like criminal justice or gerontology. So CECO may be a for-profit company, but it is smaller and more scrupulous than its peers.
Also, let’s acknowledge that there are a ton of prospective students there without the money or aptitude necessary for Ivy League schools, and the few players like CECO that remain will have a bigger piece of the pie with this underserved population.
Career Education Corp. is profitable and has been on a tear in since November on the hopes of easier days ahead under a more receptive Republican administration. Ride the momentum in 2017 and beyond with this cheap stock.
Market cap: $7.8 billion
YTD performance: -10%
Advanced Semiconductor Engineering is an old favorite of mine on these lists of the best cheap stocks to buy. But the nearly $8 billion semiconductor packaging and testing company remains one of the best opportunities — particularly after the steep dive in share prices since mid-October.
That’s because given the consolidation in the semiconductor space over the last few years, this is one of the best cheap stocks to buy now for buyout potential. ASX could be targeted by a larger chip company looking to bring more services in-house, and considering the recent announcement to marry Qualcomm, Inc. (QCOM) and NXP Semiconductors NV (NXPI), it’s only a matter of time before the little guys like ASX are completely gobbled up by the bigger players as they look to consolidate power.
Shares have been choppy in the past year but have remained pretty firm, so there’s no risk of a breakdown as you wait for merger news. And with a bargain forward P/E of less than 12 and projections of 7% revenue growth next year, you can be sure this stock won’t fall apart even if a deal takes some time to materialize.
This article is from Jeff Reeves of InvestorPlace.
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