Investing in cheap stocks can be risky and inexperienced investors are usually advised to stay clear of them, even though many new investors go straight to cheap stocks hoping to score big. Of course, in case of a successful investment, the returns can indeed be very big, given that cheap stocks are prone to bigger price swings, but the chances of big returns are small and these stocks require a lot of research.
In many cases, stocks that are trading on the cheap side, under $5 have slumped to such low values due to some issues faced by the company. For example, the oil slump in the last couple of years dragged many oil stocks to historic lows and there are many bargains in this space if you want to bet on a rebound in oil prices. In other instances, stocks are trading at low price levels in case of emerging companies that are working on a product and still have to show some results to their investors. In this case, the investor has to understand whether the company can successfully finish the development of the product and what is its potential.
In any case, identifying the best cheap stocks to buy requires a lot of research and since there are thousands of companies, it can be difficult to go through all of them. You can narrow down the list by screening stocks using a certain criteria, such as P/E ratio, Return on Equity, or Free Cash Flow, all of which are considered key metrics in fundamental analysis, or you can look at what cheap stocks smart money is buying and here is where our research comes in.
At Insider Monkey, we follow over 600 hedge funds and compile data from their quarterly 13F filings with the Securities and Exchange Commission. This allows us to get an idea about the collective sentiment of hedge funds towards thousands of stocks. We use the data as part of our small-cap strategy, which uses a proprietary methodology to identify the best small-cap stocks (market-cap between $1.0 billion and $5.0 billion) to follow hedge funds into. In addition, we can get an idea about what hedge funds think about other stocks, such as stocks trading under $5 per share.
With this in mind, let’s proceed to discuss five cheap stocks to buy now based on the hedge fund sentiment towards them. To pick the stocks, we looked at the most popular companies among the hedge funds in our database as of the end of 2017 and then selected those stocks that saw an increase of at least two investors during the fourth quarter.