5 Best Cheap Stocks to Buy Under $5 (2024)

In theory, buying low-priced stocks seems to make sense. If a stock trades for less than, say, $5 per share (which qualifies the stock as a “penny stock”), it’s much easier for an investor to accumulate a meaningful position in a stock with relatively few dollars. The hope, of course, is that the position will explode in value over time, because small fluctuations in the stock price can result in sizable gains.

In practice, however, buying penny stocks is hazardous. The low-priced stock landscape is cluttered with untested upstarts, companies that have fallen on tough times run by managers who’ve made poor capital decisions, and shaky balance sheets. Penny stocks are usually thinly traded, which only adds to their volatility. And of course, you can’t have the potential for sizable gains without the other side of the coin: the potential for sizable losses.

For investors nevertheless interested in buying low-priced stocks, we recommend sticking with higher-quality companies whose shares trade on major exchanges, whose stocks are trading below $5 and are also undervalued relative to their intrinsic worth. Why? For starters, quality companies generally have better staying power and stronger balance sheets, and buying stocks below what they’re worth helps to damp the price risk that often accompanies investing in low-priced stocks.

The names on our list of the best cheap stocks to buy under $5 therefore share two qualities:

• All these low-priced stocks earn Morningstar Economic Moat Ratings of at least narrow. That means we think these companies have established advantages that should allow them to fend off competitors for a decade or longer.
• These stocks look undervalued, which means they’re trading below Morningstar’s fair value estimates. Price risk is reduced when investors can buy the low-priced stocks on the cheap.

5 Best Cheap Stocks to Buy Under $5

These narrow-moat low-priced stocks all look undervalued and their share prices are below $5 as of the market close on Oct. 9, 2023.

1. Hanesbrands HBI
2. Altice USA ATUS
3. Sabre SABR
4. Lloyds Banking Group LYG
5. Sirius XM SIRI

Here’s a little bit about each of the best cheap stocks to buy under $5, along with some key Morningstar metrics. All data is through Oct. 9, 2023.

Hanesbrands

• Last Closing Price: $3.79
• Morningstar Price/Fair Value: 0.19
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow
• Industry: Apparel Manufacturing
• Market Capitalization: $1.3 billion

The cheapest stock on our list of the best stocks to buy below $5, Hanesbrands is trading 81% below our fair value estimate of $19.70. Hanes’ key apparel brands have leading market shares in their categories in the United States, which helps the company earn a narrow economic moat rating. Here’s our analyst’s take on the business:

Narrow-moat Hanesbrands is the market leader in basic innerwear (about 60% of sales) in multiple countries. We believe its key innerwear brands like Hanes and Bonds (in Australia) achieve premium pricing. While the firm faces challenges from inflation, slowing demand for apparel, higher interest rates, and a highly competitive athleisure market, we think Hanes’ share leadership in replenishment apparel categories puts it in a position for improving results after 2023. In May 2021, the firm unveiled its Full Potential plan to expand global Champion, bring growth back to innerwear, improve connections to consumers (through greater marketing and enhanced e-commerce, for example), and streamline its portfolio.

As part of Full Potential, Hanes intends to build on Champion’s popularity in North America, Asia, and Europe. Although recent results have been disappointing, we believe Champion has expansion opportunities as it and other activewear apparel have become more than just athletic apparel and are increasingly worn as lifestyle/fashion brands. Moreover, Hanes has plans to improve Champion’s footwear after recently taking control of the product. Hanes management forecasts Champion will reach $3.2 billion in global sales, up from around $2 billion presently, but we believe the macroeconomic and industry challenges have probably put this goal out of reach until 2026 or so.

Another key strategy for Hanes is to improve the efficiency of its supply chain. It has already made progress in this area, having achieved a 15% increase in manufacturing output over the past five years. Hanes, unlike many rivals, primarily operates its own manufacturing facilities. More than 70% of the more than 2 billion apparel units sold by the company each year are manufactured in its own plants or those of dedicated contractors. We believe the combination of strong pricing and production efficiencies should allow Hanes to return to operating margins above 20% for its American innerwear business by 2025 despite a tough environment that has depressed recent sales and margins.

Altice USA

• Last Closing Price: $3.10
• Morningstar Price/Fair Value: 0.24
• Morningstar Uncertainty Rating: Very High
• Morningstar Economic Moat Rating: Narrow
• Industry: Telecom Services
• Market Capitalization: $1.4 billion

Altice USA stock is undervalued, trading 76% below our $13 fair value estimate. The company earns a narrow economic moat rating based on its efficient scale and cost advantage versus its rivals.

Altice USA has struggled to maintain revenue growth recently—more than cable peers Comcast CMCSA and Charter CHTR—as it battles stiff competition from Verizon in the New York market. It has broken from its peers with plans to aggressively upgrade its networks with fiber rather than rely on traditional cable network technology. This strategy will sharply curtail free cash flow over the next few years. Still, we expect the firm’s networks will remain vital pieces of infrastructure that will generate strong, albeit slow-growing, cash flow over the long term.

Around 60% of Altice’s business is in the New York metro area, where favorable demographics have historically enabled the firm to claim high customer penetration rates and revenue per customer. The market is also far more competitive than average, though, as Altice faces competition from Verizon’s VZ Fios network across more than half the territory. After a period of neglect, Verizon has shifted its attention back to Fios recently as part of a broader corporate restructuring, causing Altice to lose customers. But Altice is upgrading its network in Fios areas to fiber, eliminating any network advantage Verizon enjoys.

The rest of Altice’s territory covers mostly smaller markets and rural areas where demographics aren’t as favorable but competition is also more limited. Customer penetration and revenue per customer were both below average before Altice acquired the operation and we believe these areas still provide some growth potential. Altice recently announced plans to extend fiber to some of these markets as well, a potentially unnecessary move, in our view.

Like its cable peers, Altice has used its network advantage to steadily increase data speeds in recent years and claim more than half the internet access market in the territories it serves, providing a solid foundation for the business. If anything, the pressure Altice has already faced in New York and the smaller markets it serves elsewhere should limit incremental competition relative to that which other cable firms will face as AT&T T and other phone companies ramp up their own fiber network construction.

Sabre

• Last Closing Price: $3.82
• Morningstar Price/Fair Value: 0.42
• Morningstar Uncertainty Rating: Very High
• Morningstar Economic Moat Rating: Narrow
• Industry: Travel Services
• Market Capitalization: $1.2 billion

Sabre stock is 58% undervalued relative to our fair value estimate of $9. The smallest company by market capitalization on our list of the best cheap stocks to buy under $5, Sabre is seeing improving demand and profits as business and international travel rebound following the coronavirus pandemic.

Despite material near-term economic and credit market uncertainty, we expect Sabre to maintain its position in global distribution systems over the next 10 years, driven by a leading network of airline content and travel agency customers as well as its solid position in technology solutions for these carriers and agents. Sabre’s 30%-plus GDS air transaction share is the second largest of the three companies (behind narrow-moat Amadeus AMADY and ahead of privately held Travelport) that together control about 100% of market volume. Sabre is also a leader in providing technology solutions to travel suppliers.

Sabre’s GDS enjoys a network advantage, which is the source of its narrow moat rating. As more supplier content (predominantly airline content) is added, more travel agents use the platform, and as more travel agents use the platform, suppliers offer more content. This network advantage is solidified by technology that integrates GDS content with back-office operations of agents and IT solutions of suppliers, leading to more accurate information that is also easier to book. The company’s platform reach should grow as Sabre continues to revitalize its technology and looks to expand with low-cost carriers and in countries where it previously had only minimal penetration, which are also markets with higher yields than the consolidated North American region.

Replicating Sabre’s GDS platform would entail aggregating and connecting content from several hundred airlines to a platform that is also connected to travel agents, which requires significant costs and time. Although we see GDS aggregation, processing, and back-office advantages as substantial, technology architectures like those of Etraveli enable end users to access not only GDS content but supply from competing platforms, which could take some volume from companies like Sabre. Also, GDS faces some risk of larger carriers making direct connections with larger agencies, although we expect these relationships to be the exception rather than the rule and for Sabre to still be the aggregating platform in either case.

Lloyds Banking Group

• Last closing price: $2.04
• Morningstar Price/Fair Value: 0.54
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: Narrow
• Industry: Banks—Regional
• Market Capitalization: $32.0 billion

The largest name by market capitalization on our best undervalued low-priced stocks to buy list, Lloyds Banking Group is trading 46% below our fair value estimate; we think shares are worth $3.80. Lloyds benefits from cost advantages and switching costs, which underpin the firm’s narrow economic moat rating.

Lloyds is a pure U.K. banking play, with 95% of its assets based domestically. Since its massive restructuring, which started in 2011, the bank has emerged as a low-risk domestic retail and commercial bank. It has shed about GBP 190 billion in runoff assets and GBP 200 billion in risk-weighted assets and has significantly reduced its dependence on wholesale funding. Today, Lloyds operates one of the strongest retail franchises in the United Kingdom.

Mortgage pricing is under pressure in the U.K. as challenger banks look to gain scale and ring-fencing regulations increase liquidity in the market. Although mortgages constitute the lion’s share of loans to customers (66%), Lloyds has delivered robust net interest margins, speaking to its large deposit funding base and policy to prioritize margins over volume. Additionally, as competitive pressure in this market segment has risen, Lloyds has shifted its focus to building out its financial planning offerings, beefed up its credit card loan book, and targeted loan growth in small and medium-size enterprises. This should allow Lloyds to offer a stronger value proposition to its clients as open banking initiatives take hold.

Lloyds is looking to add more noninterest-based income streams under its new strategy, which overall, is positive in our view. In the meantime, Lloyds benefits disproportionally from the interest-rate-hike cycle kicked off by the Bank of England.

Sirius XM

• Last closing price: $4.42
• Morningstar Price/Fair Value: 0.59
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: Narrow
• Industry: Entertainment
• Market Capitalization: $16.9 billion

Rounding out our list of the best cheap stocks to buy under $5, Sirius XM trades 41% below our fair value estimate of $7.50. The company earns a narrow economic moat rating due largely to the cost advantage of its satellite radio service.

Sirius XM Holdings consists of two businesses: SiriusXM and Pandora. SiriusXM transmits music, talk shows, sports, and news via its satellite radio network, primarily to consumers who pay a subscription fee, often tied to a vehicle as the firm’s radios come preinstalled on a wide range of cars and trucks in the U.S. Most of the stations on the SiriusXM network are proprietary, differentiating the service from streaming music and terrestrial radio.

Most new cars with SiriusXM radios come with a three- to 12-month trial period for the service. The conversion to self-pay after the trial is 37%, which represents the majority of new paid subscriptions. These customers have a monthly churn of 1.5%, implying a customer life of around five years. SiriusXM does share some of the revenue from self-pay customers with the automakers in the form of loyalty payments. Over the next five years, we expect that the satellite service will continue to expand, albeit slowly, by converting enough new- and used-car owners to self-pay to offset churn losses and by discounting the prices of subscriptions to retain customers.

Pandora, acquired in February 2019, is a streaming music platform that offers an ad-supported radio option and a paid on-demand service. Pandora still generates most of its revenue via advertising to consumers of its “radio” service, who listened to over 10.8 billion hours in 2022. The paid on-demand service only had 6.2 million paid subscribers in the U.S. at the end of 2022, a little under 5% of the estimated 133 million paid music service subscribers in the U.S. according to eMarketer.

Pandora moved into podcasting to differentiate its offering, but larger competitors like Spotify have already added this content to their services. As a result, the space has become increasingly crowded and we don’t expect the move to generate significant growth or returns. We project that while Pandora will slowly expand its subscriber base over the next five years, the segment will continue to lose money as royalty payments will remain a drag on operating income.

What Are the Morningstar Fair Value Estimate and the Morningstar Uncertainty Rating?

Morningstar thinks that companies with economic moats possess significant advantages that allow them to successfully fend off competitors for a decade or more. Companies can carve out their economic moats in a variety of different ways—by having high switching costs, through strong brand identities, or by possessing economies of scale, to name just a few. Companies that we think can maintain their competitive advantages for at least 10 years earn narrow economic moat ratings; those we think can successfully compete for 20 years or longer earn wide economic moat ratings.

The Morningstar fair value estimate represents what Morningstar analysts think a particular stock is worth. Fair value estimates are rooted in the fundamentals and based on how much cash we think a company can generate in the future, not on fleeting metrics such as recent earnings or current stock price momentum.

What’s the Difference Between Undervalued Stocks and Low-Priced Stocks?

Though they may sound alike and are often used interchangeably, undervalued stocks and low-priced stocks usually mean two different things.

Undervalued stocks are stocks that are trading below some estimate of their worth; these stocks are often also called “cheap stocks.” In Morningstar’s terms, undervalued stocks are those that trade below Morningstar’s fair value estimates. But cheap stocks can also be those stocks with low price/earnings, price/book, or price/sales multiples. Think of them as stocks on sale.

Low-priced stocks, meanwhile, are typically stocks whose share prices fall below a particular dollar amount. In this article, we’re focusing on low-priced stocks with share prices below $5, for instance. Others may consider stocks trading below $10 or $25 to be low-priced stocks.

For purposes of this article, just remember: Not all low-priced stocks are undervalued, and not all undervalued stocks are low-priced.

How to Find More Cheap Low-Priced Stocks to Buy

This article focused on penny stocks trading below $5 that were undervalued from companies with economic moats. But the screening method used here certainly isn’t the only way to find cheap low-priced stocks to investigate further.

Investors can expand their list of low-priced stocks beyond those penny stocks trading at or below $5 using the Morningstar Investor Screener. Beneath Investment Type, choose Stocks. Beneath Valuation, check both Price/Fair Value 0—0.5 and 0.5—1.0. Then, click on the cog in the results and use the search box to find “Previous Close Price.” Add that metric to your Columns list and hit the “Update” button. You now have a complete list of stocks that are undervalued by Morningstar’s price/fair value metric that you can sort based on the last close price. That will allow you to find stocks that are trading below $10, or below $25, or whatever price you consider to be “low priced.”