Pre-suppositions and bias are the two things that negatively affect a lot of our decisions, including investing. No matter how much you like to assess your investments via the lens of financial fundamentals, it’s possible you might be staying away from promising assets just because of a stigma attached to them. This is what makes a lot of investors avoid stocks trading under $5.
But if you look into this particular pool of securities, you are likely to find a lot of hidden gems. And at this price range, they only have to grow to (or beyond) an early two-digit price-tag to double your capital.
An iron ore company
Champion Iron (TSX:CIA) has only recently descended below the $5 mark. Up until July, the stock was trading close to $7 and has fallen almost 42% from its 2021 peak. One reason for this downward motion is the inevitable correction. The stock grew over 440% between the market crash valuation in March 2020 and the peak in 2021.
The company is technically Australian in origin, but it’s cross-listed on the TSX thanks to its extensive operations here in Quebec. It’s currently trading at $3.9 per share, and if it can grow up to $10 in the future, it can grow your capital by about 2.5 times. Its second-quarter results, though promising, did almost nothing to turn the momentum of the stock’s movement in the right direction, so you will have to wait for macro triggers like a hike in iron ore demand.
An energy services company
The energy sector has been on a tear lately, and many of the once run-down energy stocks, like Trican Well Service (TSX:TCW) have seen unprecedented gains. The company grew its market valuation by about 200% in the last 12 months alone in a very steady growth run, and it might continue riding the momentum created by the high energy demand.
It just might be possible for Trican’s $3.5 a share price tag to grow to $10 or beyond. In its glory days, the company did trade at prices close to $30. As an energy services company, Trican’s business is mostly related to well drilling and servicing. In 2020, the company generated about 72% of its revenue from hydraulic fracturing.
If the demand for new oil wells and servicing old ones remain strong, the company might help you double or even triple your capital in the next few years.
An air purification company
Xebec Adsorption (TSX:XBC) is one of the companies that have fallen way too far from the valuation of its glory days. About five years ago, the company was trading at about $0.12 per share. If you had bought into the company then and sold when it was at its 2021 peak, you would have grown your capital by over 91 times.
It was a pretty neat growth stock before the pandemic. But the post-pandemic unnatural growth spurt pushed the stock too high too fast. And the correction phase has been quite brutal so far. The stock is still trading at a price that’s 66% down from its 2021 peak, but the company has started to turn things around. The price grew about 37% in the last 30 days alone, and it might just be a move toward Xebec’s pre-pandemic growth pattern.
Foolish takeaway
You shouldn’t invest in a stock just because it’s under $5 (or because it’s an undervalued stock), but that’s also not a viable reason for disregarding a broad spectrum of stocks. You should look into the stock’s fundamentals and the business the stock represents. Many under $5 stocks have amazing growth potential, while a sizeable number are on a permanent downward path. Identify which is which before making an investment decision.
