It commonly known that it is not the dollar price of a stock that matters, but rather it is the intrinsic value of that piece of a company that really matters. Simply put, when one acquires a share of a stock, he/she is purchasing a very tiny ownership piece of a specific company. Therefore, cheap stocks are not necessarily low-quality stocks. Let’s imagine for a second that Apple Inc. (NASDAQ:AAPL) considers splitting its stock again and opts for a 100-for-1 stock split. As a result, the stock would trade around $1.19 per share, which does not imply that the stock became more risky. Furthermore, it is also true that many investors ignore low-priced stocks for that reason, because they are believed to be quite risky. And that is the primary reason why one might stumble upon great buying opportunities in these seemingly overlooked corners of the equity markets. Having this in mind, we will lay out a list of five stocks under $5 that might represent great bargains at the moment. We pinpointed five such stocks that are widely held by the elite hedge funds tracked by Insider Monkey. These hedge funds have surely completed their due diligence and analysis on each of the stocks mentioned, which diminishes the odds of coming across incredibly risky stocks.
We pay attention to hedge funds’ moves because our research has shown that hedge funds are extremely talented at picking stocks on the long side of their portfolios. It is true that hedge fund investors have been underperforming the market in recent years. However, this was mainly because hedge funds’ short stock picks lost a ton of money during the bull market that started in March 2009. Hedge fund investors also paid an arm and a leg for the services that they received. We have been tracking the performance of hedge funds’ 15 most popular small-cap stock picks in real time since the end of August 2012. These stocks have returned 102% since then and outperformed the S&P 500 Index by more than 53 percentage points (see the details here). That’s why we believe it is important to pay attention to hedge fund sentiment; we also don’t like paying huge fees.
5. Zynga Inc. (NASDAQ:ZNGA)
Investors with Long Positions (as of June 30): 29
Aggregate Value of Investors’ Holdings (as of June 30): $619.41 Million
The number of hedge funds monitored by our team with stakes in Zynga Inc. (NASDAQ:ZNGA) decreased by two during the second quarter. Even so, these hedge funds amassed 27.70% of the company’s outstanding stock at the end of the June quarter. The stock of the company lost slightly more than 20% during the third quarter, but has advanced by nearly 7% since the end of September. The company’s Internet-based services for social games have not turned out to be as successful as many initially anticipated. In fact, Zynga has failed to develop products that could achieve the success of its widely-known social game, Farmville. The company is anticipated to release its third quarter earnings report on November 3, so we’ll see whether it managed to generate a profit in the third quarter. Ricky Sandler’s Eminence Capital was the largest shareholder of Zynga Inc. (NASDAQ:ZNGA) within our database at the end of the second quarter, owning 76.33 million shares.