Not Many Stocks Under $5 Are Worth Consideration. Many of Them Are Low-Priced for a Reason

As the recent surge in activity on Robinhood and the adjoining run-up in beaten-down stocks suggest, investors – especially new investors – are looking for a deal in this uncertain marketplace. 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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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-cap stocks turned up? Zip—zero. The largest publicly traded U.S. company that turned up was Southwestern Energy Company (SWN), which has a share price of 3.97, backsliding earnings and sales, a market cap of $2.7 billion … and a five-year chart that looks like this:

Despite the recent rally, that’s not great. All the other stocks that matched my screen were either international stocks I’ve never heard of or American stocks with even smaller market caps. 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 after the chaos of the last 10 months, 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 Alphabet’s (GOOG) $1,934 share price and assume it’s due for a more sustained comedown, particularly after rising 35% in the last year. But when you look a bit closer, GOOG stock is technically cheap, with a price-to-earnings ratio of just 36—pretty low for a tech stock with a tremendous track record of profit growth.

Amazon.com (AMZN) is another example. At first glance, its $3,405 share price might scare you. In fact, I’ve had numerous friends say they would never invest in AMZN stock (or Alphabet, for that matter) due strictly to its four-digit share price. But even with a P/E of 90, AMZN is actually much cheaper than it was three 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 (AAPL, $135 even after a 4-for-1 stock split) or International Business Machines (IBM, $120 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, even after the big rally since last March. 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 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!

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Investment analyst and Chief Analyst of Cabot Wealth Daily, Chris Preston brings you all the latest from the investing world. Sign up to get updates and breaking news delivered FREE to your inbox. Get unlimited access to our library of complimentary investing reports.

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