The word "cheap" is often associated with a low absolute stock price. Such a notion is fallacious. Cheapness is a function of price not determined by an absolute number. A stock can trade for $200 and be a much better value than a stock trading for $5. Just look at Apple (Nasdaq:AAPL) which trades for around $565, has over $30 in cash per share and trades at P/E of roughly 13. Now compare that to a retailer like Bon-Ton (Nasdaq:BONT), which trades for about $5.75, a market cap of nearly $115 million, a debt of almost $900 million and no earnings to speak of.
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Thinking About Price
Still, that doesn't imply that low-priced stocks can't offer value. In fact, there are inherent reasons why a low-priced stock can be a tremendous value. Many investment funds cannot buy stocks that trade under $10. It doesn't matter if the stock is the most compelling bargain, investment mandate trumps rationality. The work is taking the painstaking effort and weeding through the trash to find the treasure. The first one is an easy lay up: Bank of America (NYSE:BAC). Trading at approximately $8, shares are well below intrinsic value. Some risky assets and low loan growth currently mask that value. But BAC still has a strong earnings engine that will manifest in the next year or two.
SEE: Stock-Picking Strategies: Value Investing
While uncertainty with respect to a federal highway spending bill has harmed infrastructure spending, there are some infrastructure-related stocks that are worth a look. At $9.40, Sterling Construction (Nasdaq:STRL) is a small cap pure play infrastructure construction firm that will reward patient investors. The company operates in Texas and surrounding states, areas where infrastructure spending is most vibrant. A bad quarter and uncertainty over future federal dollars has sent the stock down by roughly 35% in the past year. Insiders have been buying shares at current levels. The company trades near 73% of book value and the balance sheet is pristine: almost $4 in net cash per share. For patient investors, Sterling is an excellent option on the country's growing need for infrastructure.
SEE: What Investors Can Learn From Insider Trading
The Bottom Line
The allure of a low stock price should not be evaluated from an absolute perspective. A stock price should be evaluated relative to the future value prospects that a company is deemed to have. Quality businesses can be hiding under $10 shares because the majority of the investment community is designed to avoid businesses with arbitrarily "low" share prices. That irrationality is an advantage for the small investor.
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At the time of writing, Sham Gad did not own shares in any of the companies mentioned in this article.