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All Contents © 2019The Kiplinger Washington Editors
By Wayne Duggan
| February 16, 2017
There’s a million different ways to hunt for stocks to buy. But for investors who like to keep things simple, you can’t go wrong looking at cheap stocks with big upside.
While a low share price doesn’t necessarily mean a good value, quality low-priced stocks can be extremely volatile and deliver major returns in a short amount of time.
When the market tanked back in 2008, investors had the chance to buy all kinds of quality stocks for under $10. Today, some of those same opportunities are still out there. It simply requires a bit more effort.
You don’t have to go digging into the micro-cap bargain bin or try scraping the bottom of the OTC market barrel to find cheap stocks. There are plenty of mid-cap stocks with market caps greater than $2 billion and impressive upside potential.
Here’s a look at three stocks currently trading under $10 per share with an average analyst price target representing at least 25% upside.
Prices and data are from the original InvestorPlace story published on February 13, 2017. Click on ticker-symbol links in each slide for current prices and more.
There will likely never be a shortage of biotech stocks trading under $10. Unfortunately, many of these drug developers are one-trick ponies with hopes riding on a single drug candidate.
Biotech stocks are inherently risky due to the unpredictable nature of drug testing. But putting your eggs in one basket is never a good idea.
For example, Opko Health Inc. (OPK) investors got some disappointing news in December when the company reported lackluster data from its hGH-CTP Phase III study. Fortunately, the hGH drug is only part of the OPK pipeline.
In addition to the launch of kidney disease drug Rayaldee back in November, OPK already has chemotherapy-induced nausea drug Varubi and prostate cancer test 4Kscore out on the market as well. OPK also has other drugs in various stages of testing and is even exploring other possible applications for Rayaldee as well.
At only $8.27 per share OPK may be one of the best risk/return profiles in the biotech sector. Not only does OPK have the lowest price-to-sales ratio among all mid-cap biotech stocks, the five analysts that currently cover the stock see an average of 81.4% upside.
Urbanative via Wikimedia
Chesapeake Energy Corporation (CHK) is a bet on U.S. natural gas. For a while, it was a bit touchy for CHK stock when natural gas and oil prices were at their lowest point in years. However, at the company’s analyst day back in October, management painted a much rosier picture.
“There can be little doubt this is a different Chesapeake, which has navigated the worst of its challenges and substantially improved the balance of risk,” Bank of America wrote following the event. Bank of America and Nomura upgraded CHK stock after the analyst day. Similarly, Jefferies and Deutsche Bank raised their price targets for the stock.
Things went from good to better in November when Donald Trump was elected president. Trump repeatedly pledged to make domestic self-reliance the centerpiece of his energy policy. Trump has promised to support the U.S. oil, gas and coal industries and remove much of the environmental regulations that were in place under President Obama.
CHK stock is already well above its 2016 lows. However, at only $6.32, the 29 analysts that cover CHK stock still see an average of 25.6% upside remaining.
Rite Aid Corporation (RAD) is in a unique situation. In October 2015, Walgreens Boots Alliance Inc. (WBA) announced a buyout bid to take over RAD. The terms of the buyout offer were amended in late January.
The math on RAD’s upside is simple. If the deal goes through and RAD is forced to divest less than 1,000 stores, WBA will pay $7.00 per share. If RAD is forced to divest more than 1,200 stores, WBA will pay as little as $6.50 per share.
With RAD stock currently trading at around $5.61, the $6.50 buyout price represents 15.8% upside. The $7.00 buyout price represents 24.7% upside. The consensus analyst upside of 35.9% suggests Wall Street is optimistic about the deal’s prospects. In fact, analysts seem to see upside in RAD stock even beyond the high-end of the buyout price range.
In December, RAD divested 865 Rite Aid stores to rival Fred’s, Inc. (FRED) for $950 million cash. If that sale is enough to satisfy antitrust regulators, the deal should go through relatively soon at roughly a 25% premium to RAD’s current price.
This article is by Wayne Duggan of InvestorPlace. As of this writing he held none of the aforementioned securities.
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