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Why Stocks Under $5 Aren’t Good Values

There are plenty of stocks under $5, but few of them offer much value. And the distinction between cheap and low-priced is an important one.

Red Number 5

As last year’s surge in activity on Robinhood and the adjoining run-up in beaten-down stocks indicated, investors - especially new investors - are looking for a deal in this uncertain marketplace. A low share price can be an attractive selling point to the uninitiated. That said, it’s important not to confuse a low share price with an attractive value. I was reminded of that when I recently attempted to perform a screen for stocks under $5 with low price-to-earnings multiples.

In our constant search for cheap stocks, people often confuse cheap with low-priced. More often than not, however, low-priced stocks are either small caps or micro caps, not value stocks. Actually, it’s even rarer than that.


No Large-Cap Stocks Under $5

In my aforementioned screen, performed using the very handy stock-screening website, I looked for the following: stocks with share prices under $5 that also have a P/E ratio of less than 20. You want to know many U.S. large-cap stocks turned up? Zip—zero. The largest publicly traded U.S. company that turned up was UWM Holdings Corp. (UWMC), which has a share price of 3.94, backsliding sales, a market cap of $6.3 billion … and a six-month chart that looks like this:

This chart of UWMC is why stocks under $5 are usually best to avoid.

That’s not pretty. All the other stocks that matched my screen were either international stocks I’ve never heard of or American stocks with market caps below $2 billion. If you’re an emerging markets investor or a small- or micro-cap investor, then stocks under $5 are right in your wheelhouse. But if you’re looking for value in low-priced stocks within the current market chop, there’s basically nothing for you.

Sticker shock can be a real thing, especially for the casual or neophyte investor. It’s easy to look at Alphabet’s (GOOG) $2,562 share price and assume it’s due for a more sustained comedown, particularly given the rotation out of tech. But when you look a bit closer, GOOG stock is technically cheap, with a price-to-earnings ratio of just 23—quite low for a tech stock with a tremendous track record of profit growth. (AMZN) is another example. At first glance, its $3,054 share price might scare you. In fact, I’ve had numerous friends say they would never invest in AMZN stock (or Alphabet, for that matter) due strictly to its four-digit share price. But even with a P/E of 47, AMZN is actually much cheaper than it was four years ago, when the share price was in the 600s.

That’s not to say that AMZN is a value stock. But it’s not nearly as overvalued as you might assume just by looking at the share price.

As Warren Buffett, the greatest modern value investor, is fond of saying, “Price is what you pay, value is what you get.” And you can get plenty of value from buying high-priced stocks like Apple (AAPL, $167 even after a 4-for-1 stock split) or International Business Machines (IBM, $127 share price), two of Mr. Buffett’s biggest holdings.

Where to Find Stocks that Are Actually Cheap

There are plenty of good value stocks out there now, especially after the big comedown in growth stocks the last four-plus months. If you want help finding the best value stocks, I highly recommend subscribing to our Cabot Undervalued Stocks Advisor, run by our growth and value expert Bruce Kaser.

Bruce screens many hundreds of stocks for growth, value and bullish technical charts, and identifies the ones that will outperform the major U.S. stock market indexes—at the same time minimizing risk. If that sounds like something you’d be interested in, click here.

Just don’t expect to find many stocks under $5 in Bruce’s portfolio!

Do you own any stocks under $5? Tell us about them in the comments below!


*This post has been updated from an original version, published in 2017.

Chris Preston is Cabot Wealth Network’s Vice President of Content and Chief Analyst of Cabot Stock of the Week.