Buy These Stocks for Pennies and Turn Them into Dollars… Lots of Dollars
Take-Two Interactive Software Inc. (NasdaqGS:TTWO) as the gaming gorilla behind such mega-hits as the Grand Theft Auto, NBA, Mafia, and Red Dead Redemption franchises – and a firm with a market value of more than $20 billion and a share-price trading peak up near $215.
There was a time, however, when Take-Two was an under-the-radar “cheap stock” – indeed one that was trading for less than 10 bucks a share.
For folks keeping track at home, that’s a 2,050% windfall from a single-digit-share-price stock.
And Take-Two isn’t the only one like this.
There’s also Patrick Industries Inc. (NasdaqGS:PATK), a building products company that’s now worth more than $2 billion and whose shares trade at about $90 each.
There was a time when Patrick was worth less than $25 million – and its shares were trading at about $1.20.
For investors who played this cheap-stock play, that’s a windfall of 7,100%.
Or how about LendingTree Inc. (NasdaqGS:TREE) – the fintech leader that’s pretty much a household name these days. This go-to lender recently had a $3 billion market value and a stock price up around $220.
But there was also a time when LendingTree was worth a minuscule $60 million – with a stock price down around $5.50.
From that point to today, we’re talking about a total return of about 3,800%.
Now, I’m not sharing these stories just because I love an underdog.
If you want to make money – real money – look at these single-to-low digit stock plays.
And this isn’t just me talking: Research by academics and institutional players backs up everything I say.
If you look at the 50 biggest winners of the last decade, 39 of them started out as small- to mid-cap plays.
And quite a few of them were also low-priced (as in cheap) stocks, all with great fundamentals – like the ones we’re talking about here – indeed, the same ones I seek out for you folks here at Total Wealth.
In this two-day special report, we’re going to show you how it’s done.
Today, we’re going to show you why cheap stocks can be so hot.
Tomorrow we’ll get you started with a $7 stock to play.
You see, cheap stocks aren’t trash – in fact, they can be stock-market gold…
Getting the Edge
We buy low-price, sometimes single-digit-share-price stocks because it gives us an edge: It’s a way to uncover companies that haven’t hit Wall Street’s radar, yet. Once Wall Street starts following a company, that early edge is gone.
Face it, the big investment banks have hordes of analysts available to dig into companies’ financial statements, interview CEOs, and wine and dine executives.
They will then take this information peddle it to every institution on the planet. If they do an excellent job selling the story and the numbers, institutions will pile into the stock, and all that buying pressure will move the shares a lot higher.
Buying after Wall Street gives us no advantage, and the opportunity to make big money is gone.
If we can uncover these low-priced gems before Wall Street, then all that wining, dining and storytelling is going to make us a lot of money when the big money piles into the stock.
And we do have an advantage – because Wall Street has an aversion to low-priced stocks.
Just look at the mega-mutual funds or the giant pools of capital run by hedge-fund gurus – where the top holdings are dominated by stocks trading in multiples of $100 a share.
The investment pros like these big-dollar, big-mega-cap stocks for two reasons: These pros managing giant-sized funds are chasing returns. And they need tremendous liquidity because of the size they move.
So they need these big-cap stocks to “move the needle.”
That steers the pros away from smaller-cap, low-dollar shares.
But even in the low-price stock world, there’s good and there’s bad. We want to get rid of as much of the garbage in the low-priced stock world as we can. Eliminating the bad companies leaves us with a pool of companies with solid balance sheets and are capable of growing sales and earnings at a very high rate.
Too much debt? Into the trash can it goes.
Insiders are selling? Into the can.
Low margins in a super-competitive industry? Garbage time.
Diluting investors by constantly issuing stock? Trash time.
We want companies that have an advantage over competitors or dominate a nice niche sector of the economy. We want to buy into businesses that can generate free cash flow (FCF).
Free cash flow is what’s left over after all the bills are paid. That’s money that can be used to invest in the business, buy back, shares and eventually put dividends in investors’ pockets.
We know that revenue and profit growth are two of the most important factors in stock returns, so we want to own companies whose sales and earnings are growing rapidly.
We want companies tapping into massive social, economic, and demographic trends – to help push the sales, earnings, and ultimately the stock price higher.
Most low-priced stocks are going to be small- or mid-cap stocks.
That’s good for us because, over time, those stocks really outrun their bigger counterparts.
Don’t just take my word for it.
Ask the experts.
There are literally hundreds of studies from some of the smartest folks on the planet that spotlight – that prove – the incredible advantage investing in smaller companies and cheap stocks can give individual investors like you and me.
Eugene F. Fama and Kenneth R. French – two University of Chicago professors who are considered the fathers of quantitative investing – first wrote about the huge benefits of small-cap investing. And they did that way back in the 1970s.
If you look at long-term historical returns of various asset classes – and you look at the long run – it’s easy to see that smaller companies deliver greater returns over their bigger counterparts.
A look at the long-term returns from funds managed by Dimensional Advisors shows very clearly that funds investing in smaller stocks outperform those buying shares of bigger-cap companies.
Dimensional Funds runs a “rules-based” strategy – so “luck” is excised as a factor.
Even legendary fund manager Peter Lynch understood the advantage, telling investors that “big companies have small moves, small companies have big moves.”
We’ve seen this play out with companies that end up as leaders in their own industries.
Just look at Advanced Micro Devices Inc. (NasdaqGS:AMD), the chipmaker that’s made runs at such leaders as Intel Corp. and Nvidia Inc. Today, AMD is worth nearly $100 billion and its shares are trading north of $80 each. But there was a time when the company’s future seemed in doubt and the shares were changing hands at less than two bucks apiece.
Once again, we see that small beats big.
If you want to start making money on low-priced stocks – and I mean start today – then look no further than the Fidelity Low Priced Stock Fund (Nasdaq:FLPSX).
This mutual fund only invests in lower-priced stocks and has crushed the market for more than 30 years now.
I could go on, but you get the point: I buy low-priced stocks for the same reason Willie Sutton robbed banks.
That’s where the money is.
And I’ll be back tomorrow with a special pick – a company that’s positioned to benefit from the Biden infrastructure plan.
And a stock that’s trading for just over $7 a share.
See you then,