A good rule of thumb in the stock market is to not buy stocks just because they are cheap or low-priced … Cheap stocks (stocks that trade at discounted valuation multiples) are often inexpensive for a reason. The same is true for low-price stocks, or stocks that trade in the under-$10 and under-$20 ranges.
As such, when dealing with super-cheap stocks or super low-price stocks, investors should exercise caution. These stocks are at these levels for a reason, and it’s not usually a good reason.
Having said that, this group of beaten up stocks does offer significant upside potential. These stocks are priced for death. Thus, if anything good happens, these stocks will rise by a lot, and quickly. But you need something good to happen first, and something good only materializes for a handful of these sub-$10 and sub-$20 stocks.
With that in mind, I’ve put together a list of high-quality stocks in the under $20 bucket that are supported by healthy fundamentals, and have a realistic opportunity to rally in a big way from their current prices. Which stocks made the list? Let’s take a deeper look.
Luckin Cofffe (LK)
Stock Price: $19.48
The core growth narrative here is very favorable. Luckin is the fastest growing and second-largest retail coffee operator in China and is on track to soon become the largest player in the space. At the same time, the China economy is rapidly urbanizing and expanding, and the coffee market in that economy is surging higher, rising by over 30% last year. That makes Luckin the hyper-growth leader in a rapidly expanding market, a combination which ultimately implies tremendous long-term growth potential.
The numbers underlying LK stock are equally favorable. Luckin Coffee has a market cap of about $4 billion. Starbucks has a $100 billion market cap. To be sure, Luckin Coffee will never be as big as Starbucks. But, if the company does become a leader in what projects to be a $25 billion-plus China retail coffee market, then today’s $4 billion market cap looks like a steal.
Starbucks has about 40% market share in the U.S. Luckin can maybe do a 20% share in China. A 20% share in a $25 billion market implies $5 billion in revenue potential. On 10% operating margins and after a 20% tax rate, that equates to $400 million in net profits. A market average 16 multiple on that implies a potential future valuation target of over $6 billion. That’s way bigger than $4 billion.
Aurora Cannabis (ACB)
Stock Price: $5.57
In the under $10 category, one of the more attractive stocks to buy is undervalued Canadian cannabis producer Aurora (NYSE:ACB).
No matter which way you slice it, Aurora is one of the more undervalued pot stocks in the market. It’s cheaper than most peers on a trailing sales basis, forward sales basis, volume basis, and on pretty much every other important operating metric.
That relative cheapness in ACB stock comes despite Aurora having many strengths. Aurora is the second-largest player in the Canadian cannabis market behind Canopy Growth (NYSE:CGC), is one of the fastest growers in the market, is behind some of the top-selling products across Canada and has one of the largest production capacities.
Why, then, is ACB stock cheap relative to peers? Balance sheet. Cronos (NASDAQ:CRON) and Canopy are loaded up with billion-dollar investments from consumer staples giants, which simultaneously shore up their balance sheets and give those companies ample firepower to grow rapidly.
Aurora has no such investment. But if the stock stays this cheap for long, it’s only a matter of time before they get a big investment. Also, the company is tapping into the debt markets to raise sufficient capital to compete, meaning that in the big picture, this valuation disconnect has no reason to exist. If it gets wiped out — as it should — ACB stock could fly higher.
Stock Price: $7.90
Another hidden gem in the under $10 category is Chinese e-retailer Vipshop (NASDAQ:VIPS).
Although China’s economy is slowing, it is still growing at a robust mid single digit rate. At the same time, the digital economy remains red hot, with e-retail sales projected to rise 30% this year. Vipshop is at the heart of this robust e-retail sales growth narrative.
Further, Vipshop is a discount retailer, and if the U.S. retail landscape has shown us anything, it is that off-price retail is a winning strategy. See the stocks of Ross Stores (NASDAQ:ROST), TJX (NYSE:TJX), Walmart (NYSE:WMT) and Five Below (NASDAQ:FIVE), versus the stocks of Nordstorm (NYSE:JWN) and Macy’s (NYSE:M).
Thus, Vipshop finds itself at the convergence of two favorable trends. On one end, you have robust growth through expansion of China’s e-commerce landscape. On the other end, you have sustained popularity through an off-price retailing strategy.
Net-net, that means Vipshop projects as a sustained big grower for the foreseeable future. That sustained big growth should shoot VIPS stock materially higher from today’s sub-$10 price.
American Eagle Outfitters (AEO)
Stock Price: $16.19
A bunch of mall retailers trade in the under $20 range. But, only one retail stock is really worth buying at these levels and that stock is American Eagle Outfitters (NYSE:AEO).
Put simply, American Eagle is a winning retailer. They are succeeding where others are not. American Eagle has transformed into the king of the denim category, and denim has made a strong comeback over the past several years.
At the same time, American Eagle’s Aerie brand has been one of the hottest stories in retail because the brand has aligned itself with body positivity tailwinds. Because of these favorable dynamics, American Eagle demand has remained resilient in the face of broader mall retail demand turbulence, which has allowed American Eagle to report far better than peer numbers over the past several quarters.
The numbers speak for themselves here. American Eagle has rattled off 17 consecutive quarters of comparable sales growth, and 6 consecutive quarters of 5%plus comparable sales growth, including a 6% comp last quarter.
In the overlapping period, peer mall retailers Nordstorm, J.C. Penney (NYSE:JCP), Gap (NYSE:GPS), Express (NYSE:EXPR) and many others pretty much all reported negative comps. The norm was also big gross margin compression. American Eagle’s gross margins only fell back 30 basis points.
Broadly, American Eagle Outfitters is significantly outperforming its retail peers. This is nothing new. This has been the trend for a long time. It also projects to remain the trend for the foreseeable future. Consequently, if you’re gonna buy a mall retail stock in the under $20 category, AEO should be your first choice.
Source: Jens Mayer via Flickr (Modified)
Stock Price: $8.76
The last stock on this list is another stock in the sub-$10 category which has compelling upside in a medium to long term window.
We all know Ford (NYSE:F), the U.S. automotive giant that makes great pick-up trucks and a variety of other good cars. Naturally, that sounds like a stable business, since auto demand is fairly stable, and Ford has been a relevant player in that space for what seems like forever.
But the narrative supporting Ford stock has weakened over the past several years, mostly because the auto space is shrinking thanks to ride-sharing, and because Ford is losing share thanks to the emergence of electric vehicles.
These headwinds are very real. But they are also overstated. Sure, some urban residents will choose to forego car ownership as a result of increased ride-sharing prevalence. But most won’t because no matter how good ride-sharing gets, it won’t ever parallel the convenience of car ownership.
Further, electric vehicles are ramping, but Ford isn’t just sitting on its hands while consumption pivots. They are pivoting into the EV space, too, and the company should be able to command respectable EV share at scale.
Overall, then, the fears dominating the Ford narrative at present are overstated. Ultimately, they will pass, and when they do, Ford stock will rally from today’s depressed levels.
As of this writing, Luke Lango was long LK, ACB, CGC, TJX, WMT, FIVE and JWN.
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