3 Stocks Under $5 That Could Have Huge Upside

Diversified Royalty Corp (TSX:DIV) and CanWel Building Materials Group Ltd. (TSX:CWX) are both trading for below $5. They have each had their share of issues recently, but still have plenty of potential upside.

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Finding stocks with low share prices usually doesn’t mean anything in particular, but stocks with lower share prices do tend to be more volatile. While that may be seen as risky to some, it can be seen as an opportunity for others.

Investors usually associate the word volatility negatively, but highly volatile stocks can be highly rewarding. The key is to know how much risk you are willing to take, and how much risk is involved with each potential stock you may buy.

Here are two stocks trading for less than $5 at writing that may carry some additional risk, but definitely carry extra reward. The companies are Diversified Royalty Corp (TSX:DIV) and CanWel Building Materials Group Ltd (TSX:CWX).

Diversified Royalty Corp

As the name suggests, Diversified Royalty Corp is a multi-royalty company that receives a number of top-line royalties. Its objective is to find growing and reliable companies that need an investment and buying the royalty stream off them.

It currently owns the royalty streams of Sutton, Mr. Lube, Air Miles and Mr. Mikes trademarks in Canada. Sutton is one of the largest real estate broker companies in Canada, with over 200 offices nationwide.

Mr. Lube is the go-to place for quick lube service in Canada. Mr. Lube has over 180 locations and does more than $230 million in annual system sales.

Air Miles is one of the largest loyalty programs in Canada, with over 200 sponsors in the program. It’s estimated that two out of every three households in Canada participate in the Air Miles program.

Finally, Mr. Mikes is a restaurant company that operates 42 casual steakhouse restaurants. It does annual system sales of approximately $85 million.

DIV aims to pay investors a predictable dividend and grow the dividend through the growth of royalty payments received, and when necessary, buying new royalty streams.

It currently trades at a stock price below $3 at writing and pays a dividend that yields upwards of 8%.

CanWel Building Materials Group

CanWel is Canada’s only fully integrated national distributor in building supplies and related products.

It has faced some industry headwinds recently, which depressed its earnings levels temporarily. This has caused CanWel’s stock to be down roughly 33% the last 12 months and has brought the dividend yield up to a whopping 12.8%, as investors fear it may not be sustainable.

The industry headwinds, namely lower pricing for construction materials, weighed on margins in the second quarter. Gross margins came in at 14.1% vs. 15.1% for the same quarter in 2018.

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) was also affected by the downward pricing in construction supplies, coming in 18% lower than 2018, once the numbers were adjusted for IFRS 16.

This affected net earnings for the quarter which came in at $7.8 million vs. last year’s second quarter number of $14.7 million.

Currently, the dividend is unsustainable if earnings remain at these depressed levels, however, if CanWel can turn itself around, it should be able to sort out its problems.

There is definitely a lot of risk present, but a turnaround in the stock could provide massive rewards to investors.

Bottom line

Both companies have been sold off by the market due to the temporary issues they face. While there is risk that exists, there is also a large chance of upward price movement for those investors willing to take a shot.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Daniel Da Costa has no position in any of the stocks mentioned.

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