By David Goodboy
Monthly gains of nearly 70%, 100%, and even nearing 200% occur on a regular basis in this market segment. I’m not talking about options, futures, or risky foreign stocks of any kind. The gains are homegrown right here in the United States and can be had for under $5 per share.
These stocks, which typically represent new, growing companies, are in the small-cap sector. And I’ve found three stocks under $5 that are set up to be great buy opportunities.
How Small-Caps Produce Outsized Gains
The definition of a small-cap stock is not set in stone — it depends who you ask. But according to the most commonly accepted definition, small-caps are any public company with a market capitalization of $500 million to $2.5 billion.
I know this sounds like big money, but in the world of public enterprises, it is indeed minuscule. To put things in perspective, microcaps are any stocks with a sub-$500 million valuation, and midcaps are widely considered to have a capitalization greater than $2.5 billion but less than $10 billion. Anything over $10 billion places the firm in the large-cap space.
Over time, the small-cap sector outperforms the overall stock market. However, this tried and true maxim is not accurate this year. The small-cap Russell 2000 index has lagged both the Dow Jones Industrial Average and the broad market S&P 500 indexes. This underperformance spells opportunity in the small cap sector.
The iShares Russell 2000 ETF posted 24% gains over the last 52 weeks, but has only picked up 3.5% so far in 2017. At the same time, the SPDR Dow Jones Industrial Average ETF returned 18% gains year-over-year and a little less than 6% in 2017 and the SPDR S&P 500 ETF has soared nearly 7% in 2017 and close to 15% over the last 52 weeks.
The reason for this performance disconnect is not due to any problem in the small cap sector. In fact, outlooks are quite bullish for small-cap stocks. The difference this year has to do with the outperformance of the large-cap sector. The White House’s policy intentions of repatriation, infrastructure improvement and tax reform directly favor larger companies.
In other words, the large-caps have been supercharged thanks to the pending policy changes that are expected to send trillions of dollars into the economy.
While I fully expect small-caps to catch up to their larger cousins soon, individual stocks can outperform regardless of what happens to the overall sector.
The 3 Best Sub-$5 Stocks To Buy Now
Plug Power Inc
Plug Power Inc (NASDAQ:PLUG) is my favorite name of the bunch. Shares have been on fire recently, with the stock higher by over 80% in the last 52 weeks and soaring over 100% since its low in mid-February. PLUG’s present price in the $2.10 per share range sets up an ideal momentum-buy opportunity for the savvy investor.
Recently, the hydrogen fuel cell maker inked an agreement with Amazon to supply fuel cells and its power technology to power Amazon’s warehouse forklifts.
Analyst expects revenue to double in 2017, then double again in 2019 when the company should start to turn a profit.
Make no mistake, there is high risk with this industrial newcomer, but if the company lives up to the projections, the reward could be huge.
SUPERVALU INC. (NYSE:SVU), which boasts a market cap of just over $1 billion, has seen its stock beaten down into the value zone around $4 per share.
SuperValu beat performance estimates in its fourth quarter, showing a profit of $2.23 per share. Earnings, adjusted for one-time gains and costs, posted at 13 cents per share. Revenue came in at of $2.91 billion, and yearly results included a profit of $650 million, or $2.43 per share, on revenue of $12.48 billion.
The company is undergoing restructuring and recently acquired distributor Unified Grocers, a move expected to ramp up SuperValu’s wholesale business to over 70% of total sales. Analysts believe this will push total sales to approximately $16 billion. As earnings increase, so will revenue. These positive changes create the perfect time to purchase this bargain stock before it crosses over $5.
UTStarcom Holdings Corp (NASDAQ:UTSI) is trading for just over $2 per share. Boasting a market cap of just $75 million, the company is solidly in the microcap sector but has tremendous upside potential.
Make no mistake, the company is struggling right now due to weak results stemming from high R&D spending. But this weakness is where the opportunity lies. Analysts are expecting major quarterly EPS growth and UTSI has a solid track record of beating estimates. New management and a greater focus on core competencies are projected to turn the company around this year.
Risks To Consider: Small-cap and micro-cap stocks lack the experience of larger firms, making them inherently riskier. Always use stops and position size properly when investing.
Action To Take: Now is the right time to investigate these names further. Consider purchasing any or all of these under-$5 stocks, depending on your risk tolerance.
Disclosure: David Goodboy does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.