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.
Southwestern Energy Company (NYSE:SWN) saw 35 funds holding $628.13 million worth of its stock at the end of 2017, up by four funds over the quarter. However, compared to the end of 2016, the number of bullish investors declined by nine, while the stock lost 49% during 2017. There seems to be some light at the end of the tunnel, though, as Southwestern Energy Company (NYSE:SWN) has recently announced plans to reposition its portfolio and pursue strategic alternatives for the Fayetteville Shale E&P and related midstream gathering assets, as well as other initiatives. During this year, Southwestern Energy Company (NYSE:SWN) plans to invest between $1.13 billion and $1.22 billion in exploration and production and expects to drill between 100 to 120 wells, as well as complete 105 to 125 wells and put on sale 125 to 145 wells. Southwestern Energy Company (NYSE:SWN) expects a slight production growth this year and plans to strengthen its balance sheet and even potentially return capital to shareholders.
In Groupon Inc (NASDAQ:GRPN), the number of investors holding long positions increased by four to 26 during the fourth quarter, while since the end of 2016, this number went up by 11 funds. At the end of 2017, the investors in our database held over 9% of Groupon Inc (NASDAQ:GRPN)’s outstanding stock. For the fourth quarter, Groupon Inc (NASDAQ:GRPN) posted EPS of $0.07 and revenue of $873.17 million, versus analyst estimates of $0.09 and $852.81 million, respectively. At the same time, the company turned to a net profit of $51.1 million for the quarter, from a loss of $39.5 million posted a year earlier, while its EBITDA went up by 31% on the year and hit a record of $105.30 million. For the current year, Groupon Inc (NASDAQ:GRPN) expects EBITDA between $260 million and $270 million.
The number of investors from our database bullish on Globalstar, Inc. (NYSEAMERICAN:GSAT) increased by three to 24 during the fourth quarter and it surged from 16 funds that held shares at the beginning of 2017. Globastar, Inc. (NYSEAMERICAN:GSAT)’s stock lost some ground since the middle of 2014 amid a slowdown in revenue growth. However, in the last three quarters, the company posted double-digit growth in sales. In the fourth quarter of 2017, Globalstar, Inc. (NYSEAMERICAN:GSAT)’s sales grew by 21% on the year to $29.43 million due to higher average revenue per user at Duplex, SPOT and Simplex segments. The same segments also saw service revenue growth during the quarter, while the other segment, IGO, saw both service revenue and ARPU decline. Globalstar, Inc. (NYSEAMERICAN:GSAT) also posted a net loss of $0.02 per share, higher than the loss of $0.11 reported a year earlier.
Amid a 10% growth in Turquoise Hill Resources Ltd (NYSE:TRQ)‘s stock, the company also saw an increase in the number of bullish investors to 23 from 17 during 2017, while in the last three months of the year, the number of funds from our database holding shares went up by two. Turquoise Hill Resources Ltd (NYSE:TRQ) is an integrated mining company that focuses on operation of the Oyu Tolgoi copper-gold mine in Southern Mongolia. The company is majority-owned by Rio Tinto plc (ADR) (NYSE:RIO), which has recently announced plans to build a power station at the Oyu Tolgoi mine as part of the expansion project. In January, a force majeure was declared at the mine after Chinese coal haulers blockaded the roads near the Chinese-Mongolian border, but at the beginning of March, Turquoise Hill Resources Ltd (NYSE:TRQ) lifted the force majeure status.
Achillion Pharmaceuticals, Inc. (NASDAQ:ACHN) saw 21 funds tracked by us holding shares at the end of 2017, up by five over the quarter. At the same time, heading into 2017, 16 funds were long the stock, down from 27 funds a quarter earlier. Achillion Pharmaceuticals, Inc. (NASDAQ:ACHN) is a biopharmaceutical company that is developing small molecule factor D inhibitors to modulate the complement alternative pathway. At the end of February, Achillion Pharmaceuticals, Inc. (NASDAQ:ACHN)’s ACH-4471 candidate received a positive opinion for orphan status for the treatment of C3 glomerulopathy (C3G) from the European Medicines Agency. In December, ACH-4471 was granted orphan drug status for C3G by the US Food and Drug Administration.