Market volatility has increased and that makes cheap stocks potentially more appealing. Cheap stocks tend to be value stocks. They also tend to be beaten down from previous highs which is the reason that they offer value. But, value is a strategy that has been proven to work, in the long run.
We began our screen by focusing on stocks that trade at a low price. These stocks could be appealing for two reasons. One reason is that the low price means they have little down side risk in dollar terms. The second reason is that low priced stocks are generally the ones that deliver the largest short term gains.
One study looked at how low priced, or cheap, stocks performed relative to more expensive stocks. The study found that cheap stocks delivered more than six times the average return of the more expensive stocks in a typical quarter.
That’s why we limited our search for potential bargains by focusing on stocks priced at less than $5 per share.
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We required that the stock pay a dividend to help ensure we get paid while waiting for potential gains and then we required that the stock have a low dividend payout ratio which decreases the risk of a dividend cut.
One way to find stocks meeting these requirements is with the free stock screening tool available at FinViz.com. At this site, you could screen for a variety of fundamental factors, high levels of institutional ownership and bullish institutional transactions. An example is shown below.
Six Stocks Meet Our Strict Requirements
Remember, there is no guarantee any stock will increase in value. Also, it is important to remember when we search for stocks using quantitative measures, our goal is to identify stocks that meet those criteria. The screens we develop could be used as the cornerstone of long term investment strategies but any individual stock in the list could be a winner or loser.
Atlantic American Corporation (Nasdaq: AAME) provides life and health, and property and casualty insurance products in the United States. It operates through American Southern and Bankers Fidelity segments.
The company offers property and casualty insurance products, including business automobile insurance coverage for state governments, local municipalities, and other motor pools and fleets; and inland marine and general liability insurance products.
It also provides surety bond coverage for school bus transportation and subdivision construction, as well as performance and payment bonds. In addition to these niche products, it provides ordinary and term life insurance, medicare supplement, and other accident and health insurance products through independent agents, broker-agents, and special market agents.
The stock is relatively illiquid, which contributes to the volatility that can be seen in the chart below.
The dividend is small, just $0.02 a year which provides a yield of about 0.5%. The stock trades at just 60% of its book value, a significant discount to the insurance industry average of 90%.
Entravision Communications Corporation (NYSE: EVC) operates as a media company that reaches and engages Hispanics across media channels and advertising platforms primarily in the United States, Spain, Mexico, Argentina, and other Latin America countries. Entravision owns and operates 55 primary television stations; and 49 primarily Spanish-language radio stations.
Its portfolio encompasses integrated marketing and media solutions comprising television, radio, and digital properties, as well as data analytics services. The company also provides a suite of digital advertising solutions, including the Headway digital programmatic advertising platform, the Mobrain mobile advertising platform, and the Pulpo media advertising network, which allows advertisers to reach and engage with their target audiences by providing access to premium digital inventory at scale across a wide range of devices.
The stock offers a yield of about 4% and trades at about 23 times this year’s expected earnings.
InnSuites Hospitality Trust (NYSE: IHT) is a Real Estate Investment Trust (REIT) that owns and manages hotels under the InnSuites Hotels division and provides soft brand and technology services under the IBC division. InnSuites Hotels, Inc. owns the InnSuites and IBC trademarks and provides trademark services to 3400 hotels. InnSuites Hotels, Inc. also manages 8 hotels (6 owned by the trust).
As a REIT, the company distributes substantially all of its cash flow to its shareholders. The yield, however, is just 1.3%. The stock is shown here because it passed the screen, however it may not be the best choice for investors given the steady, multiyear downtrend and relatively low yield.
Medallion Financial Corp. (Nasdaq: MFIN) operates as a specialty finance company that originates, acquires, and services loans that finance taxicab medallions and various types of commercial businesses.
The company offers consumer loans for the purchase of recreational vehicles, boats, motorcycles, and trailers, as well as to finance small scale home improvements; and commercial loans for the purchase of equipment and related assets necessary to open a new business, or purchase or improvement of an existing business.
It also provides secured mezzanine loans to businesses in various industries, including manufacturing, and various service providers; and asset based loans. In addition, the company offers other secured commercial loans to various businesses comprising retail trade and various service providers; and other debt, mezzanine, and equity investment capital to companies in various industries.
MFIN’s association with taxicab medallions could be hurting the stock. Taxicab medallions are losing value as Uber and other ride sharing services take market share away from taxis.
The company is expected to earn $0.45 this year and $0.95 next year and is trading at less than 10 times this year’s expected earnings.
Virco Mfg. Corporation (Nasdaq: VIRC) engages in the design, production, and distribution of furniture for the commercial and education markets. It offers seating products, including 4-leg chairs, cantilever and tablet arm chairs, work surfaces and compact footprints, steel-frame rockers, stools, task and classroom chairs along with other products.
The company serves educational institutions, convention centers and arenas, hospitality providers, government facilities, and places of worship through its sales and support teams, as well as a through a dealer network.
The stock’s 1.4% dividend yield should be well supported by expected earnings of $0.29 this year and $0.39 next year. The stock could also be attractive based on its low valuation.
WSI Industries, Inc. (Nasdaq: WSCI) engages in the precision contract metal machining business. It manufactures metal components in medium to high volumes in accordance with customer specifications.
The company serves aerospace/avionics/defense industries, recreational power sports vehicles, markets, energy industry, automotive industry, and bioscience industry.
This stock offers a 3.4% yield.
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