Warren Buffett has famously said “value is what you get, price is what you pay.” Applying this principle means investors can succeed by finding value and ignoring price. If a stock is undervalued, it should be a buy no matter what the price is. But this ignores a reality investors other than Buffett face – resources are limited and they need to get the most “bang for the buck” on their investments. This leads many investors to favor low-priced stocks.
Low-priced stocks tend to deliver bigger percentage gains than higher-priced stocks. For example, a $10 move in a stock priced at $200 is a 5% gain. A $10 move in a stock priced at $10 is a 100% gain.
Small investors often prefer buying the $10 stock because they can diversify their limited investment capital buying lower-priced stocks. Buying stocks trading for $200 a share might require them to hold few positions and that can increase risk with a non-diversified portfolio.
This week, we identified five low-priced value stocks that offer investors the opportunity to capture large gains while diversifying their investments with limited trading capital.
Sportsman’s Warehouse Holdings, Inc., (Nasdaq: SPWH) is an outdoor sporting goods retailer. The company offers camping products, clothing products largely featuring camouflage patterns, fishing products and hunting and shooting products. Its stores also provide archery technician services, fishing-reel line winding, gun bore sighting and scope mounting as well as issuing hunting and fishing licenses. SPWH operates more than 60 stores in 19 states. Sales have grown steadily from $311 million in 2011 to $737 million in the past twelve months. Earnings per share (EPS) have been relatively flat over that time as the company put funds into expansion. But earnings are now expected to grow at about 16% a year. This year, the fiscal year ending in January 2017, EPS are expected to be $0.71.
For growth companies, we can use the PEG ratio to value a company, The PEG ratio assumes a stock is fairly valued when the price-to-earnings (P/E) ratio is equal to the EPS growth rate. A P/E ratio of 16 for SPWH based on this year’s expected earnings provides a price target of $11.36, about 42% above the current price.
Action to take: SPWH is a buy above $8. Consider a stop at $7.25. The initial price target is $11.36 based on the fundamentals.
Avon Products (NYSE: AVP) is another cheap value stock. Avon is the well-known maker and seller of beauty products. It is a direct marketing company with sales representatives who are often customers and a multilevel marketing structure is in place. However, Avon’s sales reps make money by selling products rather than recruiting new members. Becoming a rep requires only a $15 investment and can be done online. Without a pyramid structure, the company is unlikely to face problems that other direct sales companies have faced in recent years.
In the last year, AVP reported sales operations in about 60 countries through nearly 6 million active representatives. Avon is the number one direct selling company in Mexico, Russia, the United Kingdom, Argentina and a number of other countries. To focus its efforts on its top markets, and lower its tax bill, AVP is moving its corporate headquarters from New York to the United Kingdom. This move is part of a plan to reduce costs by $350 million, an amount equal to about 6% of the company’s revenue.
Analysts expect AVP to report a profit of $0.11 per share this year, the first profit in five years. Optimistic analysts expect EPS growth to average 300% a year as the company completes its turnaround. Given the high growth rate, the PEG ratio would not be appropriate to use the value the stock.
The average company in the personal and household products company trades at 1.3 times sales. AVP’s price-to-sales (P/S) ratio of 0.34 is about a quarter of the industry’s average. Using a ratio of 1 times sales provides a conservative price target of $13.01. This is well above the 52-week high and is a long-term (18 to 24 months) price target. Over the next 6 to 12 months, AVP could gain 75% by rallying to its 52-week high.
Action to take: Buy AVP on confirmed strength at $4.12 or above. Consider a stop at $3.54. The initial price target is $4.88, a potential gain of 18%. Longer term, the potential gains are significantly larger.
Fibria Celulose SA (NYSE: FBR) is a Brazil-based pulp and paper producer. A number of Brazilian companies are appearing on value screens as the country suffers through its worst recession in years and a political crisis involving the impeachment of its President. The long-term, chart of FBR shows the extent of the country’s economic problems. The stock has never fully recovered its 2008 bear market losses.
The selling of Brazilian seems to have reached irrational in some companies, including FBR. At the current price, FBR is trading at just 3.5 times next year’s expected EPS of $2.26.
FBR is focused on the renewable and sustainable forests and the manufacture and sale of bleached eucalyptus kraft pulp. The company has approximately 970,000 hectares located in seven Brazilian states and three pulp mills. The stock is priced at 1.2 times book value, well below the industry average of 1.7. Companies in this industry often have low book value because accounting rules require them to value land they own at the lower end of the price they paid for the land or its current market value. Because land tends to appreciate over time, they report the value using their purchase price and understate the real value of their assets.
Action to take: FBR is a buy above $8.10. Consider a stop at $7.43. The initial price target $14.94, the 52-week high which could prove to be resistance.
Fiat Chrysler Automobiles N.V. (NYSE: FCAU) designs, engineers, manufactures, distributes and sells vehicles and vehicle parts in more than 150 countries around the world. It provides cars and trucks under the Alfa Romeo, Chrysler, Dodge, Fiat, Jeep and Ram brand names. FCAU also sells luxury vehicles under the Maserati brand and after-sales services and parts under the Mopar brand.
Car companies around the world were hard hit in the financial crisis. Vehicle sales slowed as economic growth declined and the financing arms of many companies suffered large losses on consumer loans. Car companies have also, at times, flooded the market with cheap leases which pulls demand from the future for cars and trucks hurting sales in subsequent years. Analysts seem to believe the leading companies have learned their lessons and are unlikely to repeat their mistakes of the past. Expectations are especially high for FCAU.
For the next five years, analysts expect growth in EPS at FCAU to average 67% a year. Competitors are expected to grow much slower with Ford growing about 11% a year on average and General Motors averaging growth of about 14% a year.
Given the rapid earnings growth, the price-to-sales (P/S) ratio and price-to-book (P/B) ratio can be used to find conservative price targets for FCAU. The P/S ratio of 0.07 is less than 20% of the industry average while the P/B ratio of 0.5 is about half the industry average. These ratios show there is significant upside potential in the stock since FCAI could double. Using the price chart, we can develop a trading strategy to benefit from this potential upside while limiting risk.
Action to take: FCAU is a buy at $6.77 and higher. A stop should be placed at $5.75, just below the 52-week low. The initial price target is the recent highs at $8.44.
Iconix Brand Group, Inc. (Nasdaq: ICON) is a brand management company. The company owns a diversified portfolio of more than 35 global consumer brands including Joe Boxer, London Fog, Sharper Image, Umbro and Strawberry Shortcake. ICON also owns interests in Peanuts and other well-known brands
The stock price has been declining since June 2014 on concerns related to sudden changes in the management team and several earnings misses. In the past few months the price seems to have established support and some momentum indicators, including stochastics are turning bullish. ICON now trades at about 55% of its book value.
The brands it owns have significant value, about $40.45 per share according to the company’s financial statements. ICON also has cash and cash equivalents of about $8 a share on its balance sheet. Debt totals $39.39 a share. In a liquidation, the company is likely to be worth more than the current stock price of $7.32 a share. Assuming assets were sold at book value and debts were fully repaid there would be $9.06 a share left for shareholders.
As a going concern, the stock should be worth even more. Analysts expect EPS of around $1.25 for this year and next. At 8 times earnings, the stock would be worth at least $10 a share. With an industry average P/E ratio of 20, ICON could more than double in value.
Action to take: Buy ICON on a move above $7.56. A stop should be placed at $6.18. The initial price target is $8.80, a potential gain of more than 16%.