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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. Actually, it’s even rarer than that.

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1 Large-Cap Stock Under $5

In my aforementioned screen, performed using the very handy stock-screening website Finviz.com, 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.

sirius-xm-siri-chart-10-6-23.png

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 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 Chipotle’s (CMG) $1,831 share price 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.

Now, with a price-to-earnings ratio of 40, it’s certainly not a value stock (it’s the sixth-highest PE out of all 54 S&P 500 companies in the Restaurants industry).

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, $177 even after a 4-for-1 stock split) or American Express (AXP, $150 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 few months. If you want help finding the best value stocks, I highly recommend subscribing to our Cabot Value Investor, run by our turnaround 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!

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*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.