How to Buy Stock for Less Than 5 Dollars

4 Case Studies in Penny Stocks

Stacks of pennies
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Many people want to start investing in the stock market but don't have a huge pile of capital to start with, or even a few hundred dollars to invest. In the world of penny stocks, though, this isn't an issue, because you can buy shares in a penny-stock company for, in some cases, less than $1.00.

What Is a Penny Stock?

In spite of its name, a penny stock does not always cost one cent; rather, it is any stock that trades for less than $5.00 per share. There are many reasons a company would have share prices under $5.00: it could be in financial trouble, or performing below par, or it could simply be new to the public market. If you do your homework and follow a sound investment strategy, you'll be able to tell when penny stocks are worth your investment.

To get started, here are a few good stocks to review, study, and maybe even add to your penny-stock portfolio.

The balance sheet is the very first thing you should look at with your penny stock analysis. It tells you what a company owns compared to what it owes.

ARC Document Solutions (ARC) 

Traded on: The New York Stock Exchange (NYSE).

ARC provides printing, scanning, signage, graphics, tech, and other services of that nature for people who work in engineering, construction, and architecture firms. They also offer a range of special tools and solutions for any project that requires computer-aided design, digitized blueprints, large format printing, or a combo of digital products.

ARC in the Market

This company is not a "small business" by any means, being valued at $116 million, based on the current stock price (which is just above $2.10 as of the time of writing this article). For the full year 2020, ARC generated $289 million in revenue. This is lower than previous years, due to the worldwide market dip cause by the COVID-19 pandemic, but is on track to rise again. To compare, in 2019 ARC revenue topped $382 million.

ARC is one of those small corporations which is widely loved by professional money handlers (such as hedge fund and mutual fund managers). These types of traders hold 47% of all the available shares of the company. When added to the 17% owned by insiders, that leaves about 36% of ARC stock left to trade on the open market each day.

This penny stock is slightly more than two and a half times as volatile as the overall markets. This means that ARC shares have been more active in price movement and volume than the average ​stock holding. This movement can mean the gains—and the losses—are greater than you will see as compared to most other stocks.

ARC has $49 million in cash, and speaking of assets, the crucial numbers from the balance sheet look very solid.

ARC's Balance Sheet

ARC is in solid shape. It's operating costs and debts are low compared to how much cash it has on hand and how much cash it expects to come in. Here are some key stats from the most recent balance sheet (rounded to the nearest million):

  • Current (short-term) assets are $109 million, and total assets have reached $378 million. 
  • Current liabilities are $76 million, and total liabilities are $223 million.
  • Last year the company reported a $12.4 million operating income.

While profits took a dive during 2020, ARC's profit margins are on the rise again, and this trend will likely improve in the coming quarters as the market recovers from 2020. The earnings per share (EPS) from 2020 was a flat zero cents, but the last report well into the second quarter of 2021 showed EPS at two cents, and a price to earnings (P/E) ratio at only 14.1.

A price to earnings (PE) ratio compares the share price of a company's stock to how much it earns per share. It can be used to assess a stock's value, or to predict how it might perform. A high PE might mean that a stock's price outweighs its value, while a low PE might mean that a stock is undervalued, and a smart value buy.

RealNetworks (RNWK)

Traded on: The NASDAQ

You almost certainly have used RealNetworks' main product, RealPlayer, at some point. After all, it's built into most computers before you even take them out of the box.

The company has grown a great deal since these early roots. Now, their portfolio includes games, music for call waiting, apps, and other programs to help people have the best experience with technology possible.

RNWK's Revenue

So, is RNWK on the right track? $18 million in revenue in all of 2020, and $15.9 million in revenue just a few months into 2021 says so.

At last check, this $81.9 million company was priced at $2.39 per share. RNWK has $17 million in cash on hand, and current debt of $22.7.

RNWK's recent profits are worth a closer look. First of all, net income and profit margins are way down. But, RNWK gets a "buy" rating. This may seem odd, until you factor in that some stock that hits rock bottom can be bought on the cheap. Then if the company is due for growth, the stock will rise. Professional investors are pretty greedy with this one—they hold over 70% of all available shares.

Will RNWK Return to Growth?

In 2019 RNWK restructured two of their three main operating divisions. This cost some money upfront, which can be seen on the company's balance sheet, and in the changes to the ratios that compare expenses and earnings.

But here is a good lesson when analyzing the balance sheet: sometimes a company will invest in improvements or make internal changes that will benefit their bottom line in the long run. Now that the money is spent, and the heavy lifting is done, RNWK expects increased efficiency in how they run things, which will pay off in the coming months and years.

One way to help measure a company's stability is through its repeat revenue. This is how much of its earnings recur on an ongoing basis. The greater the percent of repeating revenue, the more fiscally stable and predictable the shares become. Stable and recurring sources of revenue also insulate the company from shocks such as a lawsuit, the loss of a major customer, or other cash crunches.

Misonix (MSON)

Traded on: The NASDAQ

After 2020, many people's fears about a potential recession and the impact it would have on stocks became reality. There are certain types of businesses which can suffer greatly during a recession (such as luxury goods, and non-essential products and services). But there are also the types of companies which will be fine (such as pharmaceuticals and medical surgery services).

Misonix is in the latter group. They provide medical tools, supplies, and cutting edge surgical devices. They specialize in tools for spine and skull procedures, as well as the tools for cosmetic and laparoscopic procedures, among other things. 

Recession or not, people tend to go ahead with life-saving and life-altering medical procedures. That is what makes MSON such a solid store of value when many other stocks teeter on the brink of failure.

MSON's Growth Potential

Before we dive too deep into the balance sheet, it should be said: MSON is no longer a penny stock. In fact, at last count, its shares were selling at a price of $19.46 per share. Revenue in 2020 was over $62 million, which is a 60% increase from the year before.

When you look a few years back, you can see how MSON has grown over time. Between 2014-2019 price per share landed in the five to ten dollar range. Prior to 2013, MSON shares sold for less then five dollars.

Some of MSON's customers are located in China and Russia. Both of these markets have showed weakness in the past, but represent the chance for increased sales activity, and massive growth.

MSON in the Market

The company is in solid shape, with over $64.7 million in ready cash, and $203.8 in assets overall, and by comparison, a measly $17.3 million in current debt. As well, they can fund their current operations from cash flow alone. The company is currently valued at $388.80 million.

One industry that is proven to maintain a steady store of value, no matter the state of the economy or blows to the market, is healthcare. People rarely hold off on medicine or life-saving procedures simply because of recession, inflation, stock market weakness, or otherwise.

DarioHealth Corp. (DRIO)

Traded on: The NASDAQ

DarioHealth Corp., formerly known as LabStyle Innovations Corp., has a lot of great things going for it, including but not limited to advances in healthcare and technology.

DRIO provides laboratory testing capabilities direct to consumers, using a person's own smartphone. For example, their Dario system allows you to use your mobile device to test and monitor your blood glucose levels. This particular invention has been a breakthrough for people with diabetes, but can also be used in many other situations as well. Within six seconds, a patient can test their levels, log their results, and even share the data with their caregivers or doctors.

DRIO in the Market

Just like MSON, DRIO is no longer a penny stock. Note the common industry thread. At last close, DRIO shares were trading at $17.88. DRIO is a $277.86 million company, but one with potential many times that size.

DRIO's Balance Sheet

DRIO has been losing money in each of the last several quarterly periods. While net earnings are always better than losses, these kinds of operational results are actually exactly what you would expect from a company in DRIO's industry, and at this stage of their corporate life cycle.

Also, these slight losses seem much less significant when considering their fiscal position. Specifically, DRIO has $34 million in current assets, against only $7 million in current liabilities. Taking the long term view, DRIO is still sitting pretty. Their total liability position equals only $7.5 million, while they are holding almost $37 million in total assets.

DRIO's Growth Potential

With such a solid position, DRIO will have plenty of opportunity to seek out and secure growth channels. In fact, as more people adopt the Dario system, the company sees improvements in their metrics and results, such as decreases in their gross and net losses, while their revenues climb.

DRIO is also rather new to the market. They went public in late 2018, and completed their initial public offering and listed to the NASDAQ stock exchange.

They also got an early foothold in online sales, which has seen a boom in the last couple years. As people start to feel more comfortable with remote medicine, and taking their health (including testing and monitoring) into their own hands, DRIO's technologies is likely to see ongoing growth.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.