[ Editor’s note: This story was originally published in August 2018. It has since been updated and republished. ]
The stock market’s volatility in recent months has not made me less bullish on the five cheap stocks profiled in this article. Among these stocks, market movements can cause some noise. But the investment thesis on cheap stocks is predicated on huge moves higher in the long-term. Thus, in the near-term, macro-driven movements amount to nothing more than a sideshow.
From this perspective, now might be a good time to pile into some stocks under $5. These stocks are a high-risk bunch. But they do have high-reward potential, too.
With that in mind, here is a list of five cheap stocks, which I think have big upside potential.
Pier 1 (PIR)
PIR Stock Price: 75 cents
Furniture retailer Pier 1 Imports (NYSE: PIR ) has had a tough time getting its act together for several years. Peer Restoration Hardware (NYSE: RH ) has seen its stock rise 30% over the past year thanks to a red-hot housing market and robust demand for home furnishings. PIR stock, however, has collapsed during that same stretch. These problems aren’t new. Over the past five years, this stock has lost more than 90% of its value.
Having said that, there is visibility for a turnaround in PIR stock in the near future.
At its core, Pier 1 has been killed by rising e-commerce threats creating huge pricing and traffic headwinds. Pier 1, which stands somewhat square in the middle of price and quality, doesn’t really have anything special about the business to protect against these headwinds. Consequently, sales and margins have dropped in a big way.
But, the company has a three-year strategic plan to turn the business around. The plan includes bigger investments in omni-channel commerce capabilities and marketing.
No one knows whether this plan will actually work. But home furnishings is a market with enduring demand, so that helps.
Meanwhile, PIR stock is dirt cheap. This company used to have earnings power of $1 per share. Even half of that earnings power (50 cents) would be huge for a stock trading under $1. At 50 cents per share in earnings power, it wouldn’t be unreasonable to see this stock hit $8 (a market-average 16x multiple).
GRPN Stock Price: $3.46
Much like Pier 1, savings-king Groupon (NASDAQ: GRPN ) feels like one of those companies that were loved yesterday but will be forgotten tomorrow. But I don’t think that’s true. I get that the savings and deals market is commoditized now. I also understand that Groupon really isn’t a household name for coupons like it used to be.
But I’m a numbers guy. And Groupon’s numbers are pretty good. Its margins are improving thanks to management’s focus on higher-margin businesses. Operating expenses are also being removed from the system, so the company’s overall profitability profile is improving.
Aside from the numbers, Groupon launched an aggressive advertising campaign last year with hyper-relevant Tiffany Haddish that scored just shy of 100 million views. I think this campaign will have a long-term positive effect on usage, which could drive the stock higher.
Put it all together, and it looks like GRPN stock could have a big-time rally in 2019.
ZNGA Stock Price: $5.22
Note: ZNGA stock rose over $5 since this article was originally published.
I’m not a huge fan of the mobile gaming sector. It’s a tough space plagued with competition and low margins. Plus, competition is only building thanks to social media apps becoming increasingly multi-purpose. But mobile gaming company Zynga (NASDAQ: ZNGA ) seems to have found the key to success in the mobile gaming world.
Zynga used to be a mega-popular browser game company with tons of users. But then the company overreached by branching into games that had heavy overlap with the traditional video game market, like sports titles. They couldn’t compete in that market. Eventually, the over-extension sparked user churn, and ZNGA stock spiraled downward.
That forced Zynga to re-invent itself into something much more relevant and defensible. They did just that. Zynga has transitioned its business model from web-focused to mobile-first while narrowing its gaming title focus. This pivot has streamlined operations, re-invigorated top-line growth, cut costs and improved profitability.
Consequently, the numbers supporting Zynga are pretty good. In Q4, its revenue rose 7% year-over-year and its bookings jumped 19% YoY. Finally, its operating cash flow soared 241%.
From where I sit, this pivot appears to be in its early stages. Mobile is a secular growth narrative, and ZNGA has developed a gaming portfolio that is focused and tailored to that growth narrative. Thus, so long as mobile engagement heads higher, Zynga’s numbers should get better. Better numbers will inevitably lead to a higher stock price.
ARTX Stock Price: $2.88
There is no hiding the fact that the defense sector has been hot under President Donald Trump. Trump came into office, upped the ante on defense and military spending, and in response, the whole world is spending more on defense and military.
Defense contractors win when this happens. That is why mega-cap defense contractors like Lockheed Martin (NYSE: LMT ) and Boeing (NYSE: BA ) have been on fire for the past several quarters. But one micro-cap defense contractor that has missed out on this rally is Arotech (NASDAQ: ARTX ). Over the past several years, the financials at Arotech haven’t gained any ground. Five years ago, its revenues were $103.5 million and its net income was $3.5 million. In 2017, its revenues were $98.7 million and its net income was $3.8 million.
In other words, its profits haven’t risen much in five years. When profits don’t go up, the stock tends not to go up. It is a simple relationship. But its profits are stabilizing. When profits go from declining to stabilizing, they usually go to growth next.
And, when profits go up, stocks tend to go up. As such, it looks like Arotech is finally joining the tide when it comes to big boosts in defense and military spending. This tide will inevitably lift Arotech’s earnings power substantially, and ARTX will rally as a result.
Blink Charging (BLNK)
BLNK Stock Price: $2.86
When it comes to cheap stocks, there are few as volatile as Blink Charging (NASDAQ: BLNK ).
Over the past two years, BLNK stock has gone from $10 to $3, and popped from $4.50 to $8 … it now sits at a paltry $3.04. This volatility won’t give up any time soon. Thus, if you want to avoid volatility, I’d say avoid BLNK stock.
That being said, if this company’s secular growth narrative surrounding building a network of electric vehicle charging stations globally materializes within the next five years, this stock could be a 5-to-10 bagger.
It is a big risk. But, eventually, global infrastructure will need to match demand. At that point in time, there will be some huge contracts awarded to electric vehicle charging station companies.
Will Blink be one of them? Perhaps. Tough to tell. But if they do land some big contracts, this stock could have another huge pop in a short amount of time.
As of this writing, Luke Lango was long FB, PIR, GRPN and ARTX.
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