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Myths and Misgivings about Low Priced Stocks

Low priced stocks, just those words conjure images of excitement and wonder to most investors. More times than not, however, they are just images... or better said, dreams. But they don’t have to be.

There are many misgivings about buying stocks that have low prices. These saying generally contain a shred of truth, but too many times they will steer you wrong.

Let’s go over some of these myths, sayings and otherwise false narratives that surround low price stocks. Breaking these bad habits may be just the thing to turn your portfolio around!

I Can Buy 1,000 Shares

This fallacy of an argument is rooted in simple math and a lot of greed. I am not saying it is bad to be greedy... you just have to pick your spots.

When an investor sees a low priced stock, something in the middle or low single digits, they often think they should buy 1,000 shares. The thought process usually leads to the idea that this $5 stock could become a $6 stock and I will have made $1,000.

That sounds simple enough, and technically it is true. The idea that I want to stress here is that sometimes a low priced stock could be even more important to your portfolio and an investment of only $5000 or $6000 might not be enough. Conversely, if you have a smaller overall investable amount, it could be too big.

Know your risk profile and allocate funds accordingly.

Easier To Double?

If I had a nickel for every time I heard this idea, I would already be enjoying my retirement in the south of France. So many times I have heard it is easier for a $5 stock to become a $10 stock than a $50 stock moving to $100.

Let’s tackle this one from a mathematical perspective. A stock that move from $5 to $10 has increased by 100%. If you move the decimal spot over one, then you get a $50 stock moving to $100. You have that same 100% move.

Now you might think that more people would be able to, or willing to invest in a low priced stock, but that isn’t necessarily true. In fact, the big institutions are known for NOT going after the little stocks.

At the end of the day, a stocks movement and potential to double is not a function of the price of the stock. Instead it is the underlying demand for the shares and the prospect for growth.

When you have the right recipe in a low priced stock then you really have something. Oftentimes, investors are substantially rewarded, but they must show patience. continue reading . . .


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Institutions Cannot Hold Them

Over the years I have heard this one as though it was a whisper from on high. The big boys and girls that really run things consciously avoid the smaller stocks. At least that is what they want you to believe.

Having worked at large financial institutions in the past, I know there was a “$5 Rule” that stated a portfolio manager could not hold a stock priced less than $5. Thing is, that same institution held $3 stocks in the trust accounts and in the broader portfolio.

Talking out of both sides of your mouth is never a good thing. I can tell you the portfolio managers were discouraged from holding very low priced stocks, but it wasn’t strictly forbidden. Just look at the history of stocks like SIRI and AMD – they have spent time below $5 and still showed up on 13F statements of ownership.

It is true that the biggest investment houses can hold single-digit stocks. But the truth is, they are extremely selective when it comes to holding these stocks.

The Important Truth

Investing in low priced stocks does have its pitfalls, but the rewards can be huge for getting in at such low levels. Oftentimes when a find a good stock at a low price, even a small amount invested can become big dollars.

Buying in at say $8 makes it really easy to hold the stock at $16 even when there is a rough patch. It is important to recognize that just because a low priced stock is moving higher, there are still bumps in the road.

Investors should look for the stocks that have found a bottom and have seen earnings estimates move higher. Leveraging the Zacks Rank will give any investor a chance for success with low priced stocks.

One of the easiest ways for you to find high quality single-digit stocks with positive price trends and improving earnings is to follow my Stocks Under $10 portfolio.

Stocks Under $10 focuses on companies on the verge of big upward moves. We get in when the Zacks Ranks and other proven indicators point to success ahead, then ride them long and high. For example, we've recently closed out positions with gains as high as +55.3%, +63.2%, even +129.9%.1

Now is a great time to join the investors following my live buys and sells. With the stock market having its best quarterly performance since 2013 – with small caps leading the way – we’re looking for a lot more double- and triple-digit gains in the months ahead.

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Brian Bolan is our aggressive growth expert and the editor of the Zacks Stocks Under $10 portfolio.

¹ The results for the trades listed above are not (or may not be) representative of the performance of all selections made by Zacks Investment Research's newsletter editors.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
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