Stocks selling for less than $10 have a raffish charm.
It’s hard to imagine an IBM or Amazon.com tripling from their lofty prices, but it’s easy to imagine some $10 stock going to $30.
Any professor of finance will tell you that this is fallacious: The absolute price of a stock is arbitrary, and what matters is the ratio of the stock price to present and future earnings.
On the whole, I agree with the professors. But stocks selling for single digits are often obscure, and I like obscurity because it may mean a stock is under-researched and perhaps undervalued. Some other people like them because they tend to be more volatile, to give more “action.”
So here is my once-a-year list of stocks I like selling for less than $10.
AU Optronics
AU Optronics Corp. (AUO, $4.27), based in Taiwan, makes flat-panel display screens and solar energy components.
Profits have been choppy. In the past ten years, it has had three loss years and one year – last year – when return on equity exceeded 20%. Only two analysts follow the company, and they don’t expect the good times to last. One rates it a “hold,” the other a “sell.”
But I like the stock. It is cheap by most measures – selling for 0.37 times revenue, for example -- and scores very well on the Piotroski F score, a multi-factor measure that gauges the quality of earnings and helps separate the wheat from the chaff among value stocks.
Chico’s FAS
Plenty of clothing stores chase the business of women aged 18-35, but Chico’s FAS Inc. (CHS, $8.50) concentrates on women over 35. I feel that gives it a bit of an edge, as it’s a slightly less crowded niche.
The initials FAS stand for Folk Art Specialties. When first founded in the early 1970s, the store mostly sold Mexican folk art. It metamorphosed into a clothing store because sweaters were one of its best-selling items. The “Chico” part of the name comes from a parrot belonging to one of the founders’ friends.
Chico’s has some 1,500 stores, selling under the brands Chico’s, White House Black Market and Soma. Like many retailers, it is struggling lately. Still, profits are respectable, and the stock seems cheap to me at about 12 times earnings.
Laredo Petroleum
Based in Tulsa, Oklahoma, Laredo Petroleum (LPI, $9.23) endured two years of severe pain in 2015-2016 after oil prices collapsed. It appears to be on the comeback trail now.
The 24 analysts who follow Laredo are evenly split: 12 call it a “buy,” 11 a “hold” and one a “sell.” I like it when analysts are split. It raises the possibility that the consensus and the reality may diverge.
Laredo trades for about seven times the earnings analysts expect for next year.
Computer Modelling Group
If you are a patient investor who likes to buy straw hats in January, Computer Modelling Group Ltd. (CMDXF, $7.67) might be a good stock for you.
The Canadian company, based in Calgary, Alberta, makes software used to simulate oil and gas reservoirs, making drilling more efficient. After oil prices collapsed in mid-2014, Computer Modelling Group’s revenue fell, from $67 million in fiscal 2014 to $56 million in fiscal 2017.
The company is recovering slowly from that trough. It remains unusually profitable, with a 37% return on equity lately. (In the boom times, return on equity exceeded 50% three years running.) The company is debt-free.
Fortuna Silver
As a speculation, I like Fortuna Silver Mines Inc. (FSM, $5.71) of Vancouver, British Columbia. Earnings have been spotty (positive in seven of the past ten years, negative in three) but have been improving lately.
Thought it’s based in Canada, the company mines mainly in Peru, Mexico and Argentina. It produces silver, gold, lead and zinc. What I like best about Fortuna is its balance sheet. Debt is only 7% of stockholders’ equity, and it has more cash than debt.
The Record
Confession time: My record in picking stocks under $10 is poor. My average gain in 12 previous columns on the subject has been 0.95%, versus 9.93% for the Standard & Poor’s 500 Index over the same 12 periods.
Why do I persist? Three reasons. First, some investors are specifically on the lookout for stocks in this price range.
Second, if I dropped every series of articles in which I didn’t excel, my results would be prone to a marked “survivorship bias.” There is probably some survivorship bias as it is.
Third, I want readers to believe me when I report great results. If I never reported bad results, my credibility would suffer.
Disclosure: I own Computer Modelling Group shares personally and for most of my clients.
John Dorfman is chairman of Dorfman Value Investments LLC in Newton Upper Falls, Massachusetts, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at [email protected].
