Have you tried searching through the market’s bargain rack?
Combing through stocks under $5 can be a great source of new investment ideas. Because the price tags on these stocks are so small, they don’t tend to draw much attention from Bay Street money managers. And after all, it’s far easier for a $2 stock to double to $4 than it is for a blue-chip giant to make the same move from $40 to $80.
So for those of you that don’t mind snooping through the equity discount bin, here are five sub-$5 stocks that have big upside potential.
1. Athabasca Oil Corp
Fill up your gas tank now, because oil prices are going back up.
According to Chris Lafakis, a senior economist at Moody’s Analytics and head of the firm’s energy coverage, oil prices could be on the verge of an epic rally. How can he be so optimistic? It’s Economics 101.
Mr. Lafakis believes that the huge drop in prices from more than US$100 per barrel last summer will inevitably lead to higher demand. At the exact same time, supply is falling off a cliff as producers delay drilling projects. The end result could see oil prices rally all the way back to US$80 per barrel, nearly a 75% jump from today’s levels.
It’s the classic resource cycle. But eventually, oil prices are likely to recover, just like they always do. And if that happens, profits at the most marginal producers like Athabasca Oil Corp (TSX:ATH) will soar higher.
2. Sandstorm Gold Ltd.
Royalty companies are like the loan sharks of the mining industry and they’re one of my favourite ways to invest in the resource business.
These companies are unique because they don’t actually operate any mines themselves. Rather, these firms finance new projects and earn royalties on future output. It’s a business model that has proven to be a far more profitable way to invest in gold mines than traditional resource stocks.
However, even top-tier royalty names like Sandstorm Gold Ltd (TSX:SSL)(NYSEMKT:SAND) have been hit hard by the industry doldrums. But now the stock is so cheap, management is backing up the truck and buying shares hand over fist. That’s an incredibly bullish signal.
3. Bombardier, Inc.
Bombardier Inc (TSX:BBD.B) is off to a rough start in 2015.
Last month, management announced a “pause” for an “indeterminate period” in the Learjet 85 program, interpreted by some market analysts as permanently shelving the project. Even worse, executives acknowledged that the company could be forced to raise more capital this year. This sent shares plunging 35% in January.
Here’s the thing: the worst-case scenario has already been priced into the stock. However, issues surrounding the Bombardier CSeries aircraft are starting to be resolved. In addition, the company’s project backlog is approaching $50 billion, which is enough to keep the company busy for two full years.
Those catalysts could lift shares in the months ahead.
4. Denison Mines Corp.
These are hard times in the uranium business.
Following Japan’s Fukushima disaster in 2011, nations have been scaling down or scrapping their atomic power programs. Producers, such as Denison Mines Corp (TSX:DML)(NYSEMKT:DNN), have watched their profits dwindle.
But this situation isn’t going to last. Supplies are beginning to tighten. Small producers are going bust. Eventually, the principles of economics dictate that prices will rise to meet the average cost of production, which is around US$75 per pound. That’s more than 50% over today’s levels.
In the meantime, the industry is being forced to consolidate. That could make Denison an attractive buyout target for a larger player like Cameco Corporation. But even if no acquisition occurs, the company still has a huge asset base with giant exploration potential.
5. Kinross Gold Corporation
There’s no way to sugar coat this: Kinross Gold Corporation (TSX:K)(NYSE:KGC) is in trouble.
As a result of falling gold prices, Kinross has been forced to write off millions of dollars in reserves. Compounding these problems, there are now worries that the company’s two Russian mines could be nationalized.
This is a valid concern. That’s why the market is awarding almost no value to Kinross’s Russian operations. However, if these assets are not seized as feared, this company could be worth substantially more.
