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Financially Stable Stocks With Low Prices

by John Bajkowski

Financially Stable Stocks With Low Prices Splash image

Are you better off owning a $4 stock or a $40 stock? Most savvy investors would first want to know a few details such as how the price compares to earnings and the firm’s growth potential and risk. However, a recent study by Soosung Hwang and Chensheng Lu looked at the performance of stocks across different price levels and found that portfolios of low-priced stocks (share price below $5) have outperformed higher-priced stocks even after considering transaction costs. The study focused on one-year holding periods, but the effect held true over longer periods as well. This excess performance was not explained by firm factors such as size or valuation.

This issue’s First Cut starts with exchange-listed stocks with a price below $5 per share that have positive earnings for the most recent 12 months and latest fiscal year. Looking forward, the First Cut stocks have positive consensus earnings for their current fiscal year and have experienced a positive earnings surprise in the latest reported quarter. As a screen for financial strength, the passing stocks have a ratio of total liabilities to assets below the norm for their industry. Twenty eight stocks made the First Cut and are presented in the table below, ranked by their 52-week relative price strength. The percentile rank is computed against all stocks. The 52-week high and low prices provide a feel for the range of price movement over the last year and allow for a quick comparison relative to the current stock price. The market cap (share price times number of shares outstanding) gives a feel for the size of the firms. A general sense of valuation is displayed through the price-earnings ratios.

The study did not focus on the risk of these low-priced portfolios. Stocks with low prices face the possibility of exchange delisting. The low price can also be sign of financial distress. Most of the excess return of these low-priced stocks occurred around January. The lower liquidity of these low-priced stocks may have created a more pronounced January effect.
 

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John Bajkowski is president of AAII.


Discussion

Samuel from Illinois posted over 3 years ago:

What is the screening criteria to reproduce these results? Can you provide your screening criteria for all your articles?


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