When a stock trades below $5, that’s usually a sign saying stay away.
“Buying penny stocks is hazardous,” notes Susan Dziubinski, an investment specialist for Morningstar.
“The low-priced-stock landscape is cluttered with untested upstarts; companies that have fallen on tough times, run by managers who’ve made poor capital decisions; and companies with shaky balance sheets.”
Related: 10 high conviction stocks: Goldman Sachs
In addition, “penny stocks are usually thinly traded, which adds to their volatility,” she said.
High Quality, Undervalued
But if that doesn’t deter you from low-priced stocks, “we recommend sticking with higher-quality companies whose shares trade on major exchanges and are undervalued relative to their intrinsic worth,” Dziubinski said.
Morningstar created a list of “the best cheap stocks to buy under $5.” The stocks share two traits. First, they have a Morningstar moat rating of narrow. That means Morningstar analysts see the companies having competitive advantages for at least 10 years.
Also, the stocks are undervalued, meaning they trade below Morningstar’s fair value estimates.
Here are the fabulous five. The list starts with the most undervalued stock as of Oct. 9.
1. Hanesbrands (HBI) -), the clothes maker.
Morningstar fair value estimate: $19.70. Wednesday price quote: $3.95.
“The firm faces challenges from inflation,” wrote Morningstar analyst David Swarts. But “slowing demand for apparel, higher interest rates, and a competitive athleisure market put Hanes's [market]-share leadership in replenishment apparel categories in position for improving results after 2023”
2. Altice USA (ATUS) -), a cable TV company.
Morningstar fair value estimate: $13. Wednesday price quote: $3.13.
“Altice USA has struggled to maintain revenue growth recently — more than cable peers Comcast (CMCSA) -) and Charter (CHTR) -) — wrote Morningstar analyst Michael Hodel.
“Still, we expect the firm’s infrastructure will generate strong, albeit slow-growing, cash flow over the long term.”
Travel, Banking, Media
3. Sabre (SABR) -), a travel reservation system.
Morningstar fair value estimate: $9. Wednesday price quote: $3.89
“Sabre has “near-term economic and credit-market uncertainty,” wrote Morningstar analyst Dan Wasiolek.
But “we expect Sabre to maintain its position in global distribution systems over the next 10 years, driven by a leading network of airline content and travel agency customers and its technology solutions.”
4. Lloyds Banking Group (LYG) -), a U.K. bank.
Morningstar fair value estimate: $3.80. Wednesday’s price quote: $2.10
“Lloyds is a pure U.K. banking play, with 95% of its assets based domestically,” wrote Morningstar analyst Niklas Kammer.
“Since its massive restructuring, which started in 2011, the bank has emerged as a low-risk retail and commercial bank.”
5. Sirius XM (SIRI) -), a radio service and owner of Pandora.
Morningstar fair value estimate: $7.50. Wednesday price quote: $4.51.
“Over the next five years, we expect that the satellite [radio] service will continue to slowly expand by converting car owners to self-pay,” wrote Morningstar analyst Ali Mogharabi.
Meanwhile, “Pandora will … continue to lose money” thanks to royalty payments.
The author of this story owns shares of Hanesbrands.
