A big mistake that a lot of investors make is to associate a stock’s price with its value. It is easy to fall into the trap of thinking a $90 stock has more value than a $15 stock, but that is not how the market works, and to overlook stocks just because they have a low price is a major mistake.
Value cannot be assessed simply on a stock’s price. There are a lot of variables that go into a stock’s value and remember, you can achieve the same investment in a low price stock as a high price stock by simply buying more shares, and there is an advantage to having a bigger position in a lower cost stock because it gives you the opportunity to sell calls against your position to limit your risk if you have at least 100 shares. There are some securities that have mini options that do not require 100 shares, but for the most part, you will need 100 shares in order to consider selling a call against your position should you chose.
Value has to be determined by looking at where a stock is trading in comparison to its earnings potential. That is the true meaning of value. A $100 stock that is going to grow earnings by 2 or 3 percent over the next year has less value than a $20 that is expected to grow earnings by 15%.
To find low priced stocks with a lot of value, we want to look at how strongly the company is expected to grow earnings moving forward, where the stock is trading in relation to its earnings, and how high analysts expect the stock will rise should those estimates be hit.
Here are five stocks that are currently trading below $20 that appear to have a lot of value with very bullish price targets.
Goodrich Petroleum Corp.
Oil and gas exploration and production company Goodrich Petroleum Corp (GDP) has risen since mid-2017 as oil prices have moved higher. The stock has lost some of its value over the last month – resulting from a combination of a weaker than expected quarterly report in May, and crude prices pulling back. The oil sector will always be volatile, as the price of oil can be impacted from a variety of sources, but analysts see a lot of upside in GDP from is current level. The stock is currently trading at $12.72 with an average price target of $19.60 by the six analysts who cover the stock. Should GDP manage to hit its price target, it would represent a 54% price gain.
U.S. automaker Ford Motor (F) has trended higher over the last four months, fueled in part by better than expected results on both the top and bottom line during its most recent quarter. Auto sales have definitely slowed after years of record sales, but they have slowed less than expected, and the industry remains sound. Rising interest rates could pose a problem, but it will take a few more increases before rates become a major determent to the industry. Analysts remain very upbeat on the stock with an average price target of $13.80 versus the current price of $11.74. The price target suggests that the stock is undervalued by as much as 17.5%.
Regional bank Regions Financial (RF) has been stuck in a sideways trend during 2018, but rising interest rates create a favorable environment for the company moving forward. Regional banks are poised to benefit from rising rates since they will enjoy a nice boost in interest income. Higher rates allow banks to widen the spread on the money they lend customers versus the money they borrow to make the loans, and the higher interest income will have a material effect on profits moving forward. Analysts expect to see the bank grow earnings by 9.0% per annum over the next five years, and with a forward P/E of just 12.20, the stock should trend higher as long as the company is able to hit its future estimates. The stock trades at $18.68 versus an average price target of $20.29, suggesting 8.6% upside.
Oil and gas company Kinder Morgan (KMI) sold off during the first few months of the year, but the stock has found its footing and has been trending higher over the last two months. Oil stocks will remain volatile, but analysts believe KMI has a lot of upside left in its current move. With the company expected to grow earnings by 16.0% per annum over the next five years, and the stock trading with a forward P/E of just 18.6, the stock should move higher as long as future estimates are hit. KMI trades at $17.14 with an average price target of $20.73, suggesting 18.0% upside in the stock.
Gold exploration company Goldcorp (GG) has trended sideways over the last year, but with analysts expecting to see the company grow profits by 18% per annum over the next five years, the stock should manage to break out of its trading range and move higher. GG trades with a forward P/E of 19.1, so there is certainly reason to expect shares to move higher if the company is able to show the earnings growth that analysts expect. GG currently trades at $13.80, with an average price target of $18.31. The stock has not traded at that level since mid-2016, but if gold prices hold steady, and the company is able to grow profits as strongly as expected, shares could easily rise to that level, which would translate to a 32.5% increase from its current price.