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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

With the dominance of the “Magnificent Seven” stocks behind most of the market’s performance, investors are eager to find less “obvious” opportunities that may have greater potential, and 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.


1 Large-Cap Stock 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 how many U.S. large-cap stocks turned up? One.

Sirius XM (SIRI) is the only U.S.-listed, large-cap stock trading below five bucks a share. Sure, satellite radio has become ubiquitous, appearing in 83% of new cars sold (and 53% of used cars), and it’s subjectively “better” than terrestrial radio, but these days if you’ve got a smartphone you’re walking around with a curated playlist at all times.

For a little context, here’s a 25-year chart of the stock.


That’s not pretty. All the other stocks that matched my screen were international stocks or smaller domestic stocks. 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, 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 Chipotle’s (CMG) $3,157 share price (at least until the split) and assume it’s due for a more sustained comedown, particularly given the prospects of a weaker consumer. But assessing it on share price alone fails to account for the company’s strong growth track record.

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, $188 even after a 4-for-1 stock split) or American Express (AXP, $237 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, and if you want help finding the best value stocks, I highly recommend subscribing to our Cabot Value Investor, where I seek out growth at value prices.

Alternatively, if you’re less concerned about share prices and are more interested in finding undiscovered opportunities before they’re on Wall Street’s radar, take a look at Cabot Early Opportunities, where Chief Analyst Tyler Laundon looks for just that.

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


*This post is periodically updated to reflect market conditions.

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