Why Stocks Under $5 Aren’t Good Values

5 red

Thanks to the sharp market correction in February and March, concerns about high valuations have mostly fizzled. As values came crashing back to earth and earnings continued to accelerate, share prices look more buyable now than they did at the start of the year. 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 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 many U.S. large-stocks turned up? Zip—zero. The largest publicly traded U.S. company that turned up was Chesapeake Energy (CHK), which has a share price of 4.61, a P/E of 8.80, a market cap of $4.1 billion … and a two-year chart that looks like this:

Stocks under $5 often resemble Chesapeake Energy (CHK), unfortunately. So, that’s not particularly appealing, although it’s looking a lot better in the last three months. All the other stocks that matched my screen were either international stocks I’ve never heard of or American stocks with market caps of $2 billion or less. 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.

coins stacked up chart

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Sticker shock can be a real thing, especially for the casual or neophyte investor. It’s easy to look at Apple’s (AAPL) $207 share price and assume it’s due for a more sustained comedown, particularly after rising 32% in the last year. But when you look a bit closer, AAPL stock is technically cheap, with a price-to-earnings ratio of just 18—quite low for a tech stock with a tremendous track record of profit growth.

Amazon.com (AMZN) is another example. At first glance, its $1,828 share price might scare you. In fact, I’ve had numerous friends say they would never invest in AMZN stock (or Alphabet (GOOG), for that matter) due strictly to its four-digit share price. But with a stratospheric P/E of 229, AMZN is actually much cheaper than it was two 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 or International Business Machines (IBM, $145 share price), two of Mr. Buffett’s biggest holdings.

Where to Find Stocks that Are Actually Cheap

There are plenty of good value stocks still out there, especially now that prices have been knocked backwards a bit. 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 Crista Huff.

Crista 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. Some of her biggest winners include a 50% bump in PulteGroup (PHM) in nine months, a 53% gain in Goldman Sachs (GS) in 12 months, and a 36% boost in Applied Materials (AMAT) in five months.

If that sounds like something you’d be interested in, click here.

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

Chris Preston

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

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