Stock-market indexes fell in the final months of 2018 before jumping right back into rally mode to start the new year. The S&P 500 has more than doubled in the past decade; with growth like that in the rearview mirror, it can feel like the best deals have already been taken.
Meanwhile, companies like Amazon.com (NASDAQ: AMZN) and Google parent Alphabet have seen their share prices rise to over $1,000 each, a figure that's out of reach for many investors who hope to accumulate multiple shares of attractive businesses to hold for the long term. The good news is that there are quality buy-candidate stocks out there priced below $50 a share.
Image source: Getty Images.
What's cheap and what's not
Before we get to buying stocks, it's important to first understand that the per-share price has absolutely zero bearing on the value of the underlying business. Put another way: A $30 stock is not cheaper than a $40 stock.
Stocks are priced on a per-share basis, and the number of available shares varies wildly between companies -- or even with respect to the same company over different time periods. Think of a pizza that's been cut just once, down the middle: Each half constitutes one slice, or "share," of the whole. Cut that same pizza once again, and you now have four shares. The number of slices has increased, and the amount of pizza per slice has dropped, but the total amount of pizza hasn't changed. A whole pizza sliced into four slices isn't cheaper than a same-size pizza that's been cut into two pieces -- it's the same amount in either case. You'll just pay less per slice.
The same process applies to stocks, whose prices can be manipulated by companies performing a stock split (a 2-for-1 split doubles the share count and cuts the per-share price in half).
So when evaluating the value of a company, it's helpful to look at market capitalization rather than the share price. To calculate market cap, you multiply the per-share price by the number of shares outstanding. That's how you can tell that auto parts retailer AutoZone (NYSE: AZO), priced at $995 per share as of this writing but with a market cap of $26 billion, is far cheaper than consumer-products giant Procter & Gamble, priced at $105 per share but with a market cap of over $250 billion.
It's more useful to compare the value of similar companies using valuation metrics like price-to earnings ratios. The P/E captures the price of a stock in relation to its earnings, and the figure can tell you if a company is getting cheaper when compared to industry peers, the broader market, and its past valuations. AutoZone could be purchased in early 2019 for about 19 times the past year's worth of profits; that P/E ratio of 19 valued it close to peer O'Reilly Auto Parts, and just slightly cheaper than the broader stock market. Valuations, like stock prices, change daily, but those comparisons can always help you judge a company's worth at a given time.
Prices still matter
Per-share prices still play an important role in investing decisions, and there are legitimate reasons to hunt for lower-priced stocks. After all, it takes less cash today to buy a few shares of P&G than of AutoZone. You have more flexibility with lower-priced stocks, too, in that you can more easily trim or add to your holdings. These liquidity benefits are a key reason that companies perform stock splits in the first place.
So, with that share-price caveat in mind, let's look at some attractive businesses with share prices that have held below $50 through the first quarter of 2019.
Stocks under $50
Coca-Cola (NYSE: KO)
eBay (NASDAQ: EBAY)
Corning (NYSE: GLW)
Activision Blizzard (NASDAQ: ATVI)
Twitter (NYSE: TWTR)
Stitch Fix (NASDAQ: SFIX)
Prices as of May 10, 2019. Data source: Yahoo! Finance.
For less than $50 a share, investors today can own a piece of one of the most valuable companies on the planet. Yes, Coca-Cola is facing major challenges to its business these days. Demand for sugary soft drinks has been on a steady decline in recent years, and consumers have shifted consumption away from the Diet Coke brand that dominated the industry for decades.
These challenges have made it hard for the beverage titan to boost sales volumes lately. Revenue increased by 5% in 2018; the increase is expected to slow to 4% in 2019. That prediction puts Coke a bit behind key rival PepsiCo, which is targeting steady sales growth this year.
Yet there are many advantages to owning Coke today. It has for decades been the undisputed leader in delivering a product that consumers around the world consider a staple of their diet. Coke owns the world's top five soft-drink brands, and serves 61 billion drinks each day to thirsty people around the world.
Coke shareholders gain a few key financial benefits, too. The company's pricing power is unmatched, for example. That strength, combined with its bottler refranchising program, has allowed operating profit margin to expand to 27% of sales last year, from 21% in 2016. The beverage giant has directed some of those gains back to shareholders, in the form of a dividend that's risen in each of the last 57 years. Investors interested in a steadily growing business that returns mounds of direct cash to them each year should consider buying this stock today.
A lot has changed in the online retailing world since eBay rode its auction-based pricing platform to market dominance in the early 2000s. Since then, rivals like Amazon -- and even physical retailers like Walmart (NYSE: WMT) -- have achieved far more growth in digital sales.
This past year was a prime example of that performance gap: In 2018, Walmart's e-commerce division jumped 40% and Amazon's soared 20%. eBay's growth, on the other hand, slowed to 4% from 5% in the prior year.
However, eBay operates a platform that simply connects buyers to sellers, so it can generate much higher profits from a small sales base; it doesn't have to maintain expensive assets like a global shipping network. Net income landed at $2.3 billion last year, or 21% of sales, compared to less than 5% for both Walmart and Amazon. eBay's operating income routinely surpasses 20% of sales, compared to around 5% for these rivals.
The company is in the middle of a strategic shuffle right now, which could see it sell off noncore assets like its StubHub ticket segment. Cash raised from such a move might be more productively directed to speeding growth in eBay's buyer pool back toward the 5% it achieved as recently as 2017. In any case, the company is likely, through a newly initiated dividend and aggressive share-repurchase spending, to send lots of capital back to shareholders over the next two years. If CEO Devin Wenig and his team can combine those returns with a modest operating rebound, investors could see big gains from owning this e-commerce marketplace specialist.
Glass-technology giant Corning is seeing strong growth these days. In fact, each of its five core business segments expanded at a healthy clip in 2018, and together they lifted the company's sales by 11%. "We did what we said we were going to do," CFO Tony Tripeny summarized for investors back in January, "which was to expand our manufacturing capacity in the first half and begin leveraging those growth investments in the second half."
You don't have to look hard to find evidence of those operating and financial wins. In addition to healthy sales growth in areas like optical communications and display technology, Corning extended its innovation lead in the market last year. It also ramped up its production capabilities and is ready to meet the expected uptick in demand in 2019 and beyond.
Prices on glass displays, which go into products such as televisions and computer monitors, have been falling for more than a decade. That trend pressures Corning's earnings, especially since the display segment is its biggest, accounting for 29% of sales in 2018.
Yet the division returned to growth last year as volume gains offset more modest price declines. That's encouraging, since it implies even stronger results in 2019. However, the better reason to like Corning's shares right now is that the business maintains a leadership position in several important glass-tech industries. And now that its supply chain is bigger and more efficient, Corning has a clear path toward steady sales and profit growth.
4. Activision Blizzard
Even the best companies stumble from time to time. Activision Blizzard, the developer behind such perennial blockbuster video game franchises as Call of Duty and World of Warcraft, has suffered from some uncharacteristic setbacks lately. It parted ways with its Destiny brand last year after lukewarm gamer engagement pinched results. Challenges in its casual gaming segment held back profitability, too, as video game fans flocked to battle royale games like Fortnite.
But investors who believe these are temporary issues have a tempting chance to buy shares at around $50 each, compared to $80 less than a year ago.
Image source: Getty Images.
There are good reasons to be bullish on this stock, beyond just its cheaper price. The Activision side of the business set all-time sales and profitability records last year, for example, thanks to a Call of Duty franchise that yet again held the No. 1 spot for worldwide sales. The Blizzard and King digital segments didn't fare as well because audience sizes shrank; they still generated healthy profits, though, and each saw important portfolio wins such as Candy Crush Saga and Overwatch.
The developer is expecting 2019 to be about refocusing on leading games like these, while trimming from the portfolio titles that don't meet its engagement and monetization goals. While sales should land at around $6 billion compared to $7.5 billion in 2018, Activision is better off in the long term using resources that would have gone toward the Destiny franchise to strengthen its internally owned properties. Those development assets have seen it through many rounds of industry upheaval, and they should help the company make the adjustments needed to get back on a growth track by 2020.
There are important ways in which Twitter's business falls well behind its social networking peer Facebook. Rather than rocketing up toward a user base in the billions, after all, the microblogging site is reporting fewer scrollers these days, with active monthly users falling to 321 million in 2018 from 330 million a year earlier.
Yet Twitter is building a defensible business model, all the same. Last year was the site's first year of profitability, with net income reaching $1.2 billion, or 40% of sales. Twitter got to that goal with lots of help from advertising sales, which passed $2.6 billion in 2018. Its data licensing service is no slouch, either, delivering a 27% increase over 2017's results.
CEO Jack Dorsey and his team believe these gains could just be the start, since the service has driven the global public conversation in such influential areas as sports, politics, and breaking news. Video advertising, for example, now accounts for more than half of Twitter's ad revenue -- and as it becomes more prominent, that highly effective medium has the power to boost user engagement while adding value for advertisers.
The company still faces major challenges in making its platform safer and less prone to manipulation. Recent moves aimed at removing abusive content and purging bots from the system are likely to be followed up by many similar initiatives throughout 2019. However, now that the company has demonstrated that it can generate a healthy profit, executives have more flexibility to build a service on which the active user base better reflects the massive audience the platform has attracted.
6. Stitch Fix
Shares shot up by over 20% after Stitch Fix reported its most recent earnings results, and that spike suggests that there's still plenty of confusion on Wall Street about how to value this business. The online clothing retailer is attempting to apply a novel approach to global apparel sales by having its stylists -- not the customers -- choose fashion products and accessories, with the help of an army of data-crunching algorithms.
In that way, Stitch Fix is aiming to use technology and the convenience of the internet to disrupt a large, established industry. Such a path has generated massive returns for businesses like Amazon and Netflix, and it's an open question as to whether Stitch Fix has what it takes to follow in those large footsteps.
The latest trends are encouraging, with sales growth accelerating to 25% in the fiscal second quarter, as the company's active client base jumped 18% to 3 million. But the more encouraging metric is the rate of repeat orders, which is a good proxy for customer satisfaction. That rate was a healthy 88% last quarter.
Stitch Fix has many large and small initiatives in the works, aimed at bringing new users into the system and improving the shopping experience overall. It's planning to launch in the U.K. in late 2019 and is already benefiting from its first large-scale marketing campaign. Continued tweaks to its inventory and shopping algorithms are helping make the supply chain more efficient, while freeing up more cash for CEO Katrina Lake and her team to reinvest in the business.
All these changes mean that sales and earnings growth won't occur at a predictable pace, so volatility is a given for this stock right now. But those who can hold on through the ups and downs might be rewarded with market-thumping returns over the long term -- especially if Stitch Fix can scale its subscription service up to many multiples of its current sales base.
Broadly speaking, the fact that these stocks are priced at below $50 per share shouldn't have much practical impact on your decision to invest in them. That said, investors have good reasons to be optimistic about the competitive strengths and earnings prospects of each of these businesses, and those factors ultimately drive investor returns over the long term.
Still, adding one or more of these stocks to your watch list could help you on your way to building a diversified portfolio. The companies above cover a wide range of industries, business models, and market positions, and they all bring valuable assets to the table, such as recognizable brands and strong intellectual property. Ideally, their competitive advantages will power better investor returns than the market delivers over the next few years, and allow their stock prices to rise to well beyond $50 per share.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors.
Demitrios Kalogeropoulos owns shares of Activision Blizzard, Stitch Fix, Amazon, FB, and NFLX. The Motley Fool owns shares of and recommends Activision Blizzard, GOOGL, GOOG, Amazon, FB, NFLX, Stitch Fix, and Twitter. The Motley Fool is short shares of PG. The Motley Fool recommends Corning and eBay. The Motley Fool has a disclosure policy.