Novice investors view any stock under $10 as cheap just because they see that single-digit number. Of course, this isn't the case, as the actual price of the stock has nothing to do with the actual value of the company.
However, for some investors, there is a comfort level with stocks under $10 as they are closer to zero than a $50 stock would be. The psychology behind it is interesting, but the thinking is that there is less pain for an investor to endure if the investment goes bad.
While I personally will tend to shy away from these "cheaper" stocks, there is a lot of opportunities for high percentage returns to be made. Getting in early can lead to triple-digit returns in some instances, an incentive that makes research of these names necessary.
Below I review five recently Zacks Top Ranked small cap stocks under $10.
Exar Corporation (NASDAQ:EXAR) is a Zacks Rank #1 (Strong Buy) that designs, develops and markets analog and mixed-signal integrated circuits for use in communications and video and imaging products. The company also produces digital integrated circuits used in communications products, as well as general purpose analog integrated circuits.
Exar has a market cap of $240 million with a forward PE of 25. The company pays no dividend, but offers a growth opportunity with expected EPS growth of 20%. The stock sports Zacks Style Scores of "B" in growth and "A" in momentum.
The company reported earnings earlier in the month and the stock reacted positively after raising guidance. After a post-earnings move of over 10%, the stock finds itself back at pre-earnings levels.
Short-term investors might have already bailed on the positive news; however, this is a long-term play and should be treated as such. For fiscal-year 2017, estimates have been revised 43% higher, showing us analysts were impressed with recent earnings.
In addition, the company is building some momentum after five straight EPS surprises to the upside.
Student Transportation (NASDAQ:STB) is a Zacks Rank #1 (Strong Buy) that provides school bus transportation services in the United States and Canada. The company may not be exciting, but it offers a steady stream of revenue as it offers contracted, managed, special needs transportation, direct-to-parent, and charter services.
The company has a market cap of $380 million with a hefty forward PE of 91. The stock is not a value play; however, its 11% dividend makes it very attractive. Whenever there is a dividend that high, investors should be cautious as there is usually a reason for it.
However, recent earnings put away fears of a dividend being cut as the company beat on EPS, affirmed fiscal-year 2016 revenues up 7%, and approved the dividend. The company's outlook on the conference call talked about contract renewals and the advantages of lower fuel costs, but also emphasized long-term prospects.
Looking at the future estimates, the stock price has a long way to go to catch up. Investors sitting on the dividend, while the company proves itself, should be rewarded.
Electro Scientific Industries (NASDAQ:ESIO) is a Zacks Rank #1 (Strong Buy) that provides electronics manufacturers with equipment necessary to produce key components used in wireless telecommunications, computers, automotive electronics, and many other electronic products.
The company has a market cap of $220 million and has expected EPS growth of 20%. The stock sports a Zacks Style Score of "A" in growth and "B" in momentum. An investor must view this as a long-term growth play as the company is expected to have negative earnings until fiscal-year 2017. Over the last month, analysts have revised 2017 estimates higher, from $0.01 to $0.04.
EPS surprises are nothing new for the company as it has beaten in every quarter for the last three years. Unfortunately, it hasn't mattered much for the stock over that time frame. However, if the momentum swings higher, as it seems to have after last quarter's earnings, investors should jump on board.
Emcore (NASDAQ:EMKR) is a Zacks Rank #1 (Strong Buy) that offers a broad portfolio of compound semiconductor-based products for the broadband, fiber optic, satellite and terrestrial solar power markets.
The company has a market cap of $130 million with a forward PE of 30.
Late last week, the company reported Q1 earnings at $0.04 versus the $0.05 expected, which caused the stock to sell off over 10%. This is disappointing price action for a stock that sports Zacks Style Scores of "B" in growth an "A" in momentum.
However, analysts have revised estimates 21% higher over the last month for fiscal-year 2017; a sign that the company has longer-term prospects and should be offered some time to grow into its PE.
Himax Technologies (NASDAQ:HIMX) is a Zacks Rank #1 (Strong Buy) that designs, develops and markets semiconductors that are critical components of flat panel displays. The Company's principal products are display drivers for large-sized TFT-LCD panels, which are used in desktop monitors, notebook computers and televisions, and display drivers for small- and medium-sized TFT-LCD panels, which are used in mobile handsets and consumer electronics products such as digital cameras, mobile gaming devices and car navigation displays.
Himax has a market cap of $1.4 billion and a forward PE of 28. The company has expected EPS growth of 22.50% and sports a Zacks Style Score of "B" in Growth.
The stock reacted positively when the company had earnings on February 9th. Himax reported Q4 at $0.04 versus the $0.02 expected, and raised Q1 guidance to $0.055-0.075 versus the $0.02 expected.
Over the last month, analysts have revised estimates 55% higher, seeing fiscal-year 2016 at $0.28. Looking at the chart below, we see the future earnings potential for the company versus the current price of the stock.
There are thousands of small cap stocks out there to choose from, but coming across the next great investment isn't easy. For smaller companies, revenue growth and bottom lines will force a stock price up or down. It is important to focus on those elements and be mindful of future estimates. With the utilization of the Zacks Rank, we can narrow down the field and see which companies might bring opportunity and big returns.