Stocks: Low-Priced Gems

S&P unearthed nine issues under $10 that are good bets for bargain hunters: They're undervalued and they have momentum

by Michael Kaye From Standard & Poor's Equity Research

We're celebrating the season of giving with visions of bargains dancing in shoppers' heads. Investors can also give their portfolios the gift of some low-priced stocks in the hope that what starts as a small token can blossom into larger returns down the road.

Of course, low-priced stocks—particularly ones that cost $10 or less—might be cheap for a good reason, so investors should look carefully before purchasing. Quite often, stocks fall below the $10 mark when a company faces some sort of financial turmoil or is forced to restructure to salvage the business. On the other hand, low-fliers could be companies that haven't been discovered or appreciated by the market.

That brings us to this week's screen. In the spirit of bargain hunting, we started by finding stocks priced at $3 to $10 per share. Each one has a market capitalization above $500 million, so they are liquid, or usually easy to trade.

What We Were Looking For

In addition, each stock carries a Fair Value Ranking of 5—meaning it's the most undervalued based on S&P's proprietary quantitative model. The Fair Value Model calculates a stock's weekly Fair Value—the price at which it should trade at current market levels—based on fundamental data such as corporate earnings and growth potential, price-to-book value, return on equity, and current yield relative to the S&P 500 index. Stocks are then ranked from 5, indicating significant undervaluation, to 1, indicating significant overvaluation.

We also wanted to make sure the stocks were attractively valued, so we found ones with a price-to-earnings growth ratio between 0 and 1 (below the market median of 1.3). Plus, we wanted some momentum, or buying, behind the stocks, which means they're getting noticed by investors. Here, we made sure they have a bullish technical indicator from an S&P proprietary measure.

After all the shopping around, we found nine gems that fit in a nicely wrapped, bargain-priced box.

Kaye, a chartered financial analyst, is an analyst for Standard & Poor's Portfolio Services. He is the author of The Standard & Poor's Guide to the Perfect Portfolio: Five Steps to Allocate Your Assets and Ensure a Lifetime of Wealth.