The allure of penny stocks comes from the fact that you can buy a lot of shares for a very small cash outlay. And if the shares happen to rise after you buy them, an increase of a small dollar amount translates to a large percentage. So penny stocks are potentially tempting for some less sophisticated investors.
Despite that temptation, most of these stocks are likely worth even less than whatever price they happen to be trading at. We asked three of our Motley Fool contributors for better buys than your typical penny stocks. They came up with Baozun (NASDAQ: BZUN), Ford (NYSE: F), and Berkshire Hathaway (NYSE: BRK-A)(NYSE: BRK-B). Here's why they're likely better for your pocketbook.
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Chinese e-commerce still has explosive potential
Keith Noonan (Baozun): Investing in Chinese stocks might seem like a fraught proposition right now, and it's true that complications stemming from unresolved trade issues with the United States could impact the performance of otherwise promising companies in China. However, even with uncertainty in the trade situation, Baozun looks significantly less risky than most penny stocks and still offers big upside.
The company's business revolves around providing customizable e-commerce websites and related support services for major Western brands looking to build their presence in China's online retail market. This role comes with unique risks, some of which have been highlighted due to the trade disputes.
But Baozun still looks worthwhile for investors willing to take on risk in pursuit of huge returns. Unlike most penny stocks, the business is already consistently profitable and trades at reasonable earnings multiples. The stock is priced at roughly 34 times this year's expected earnings, and it's still delivering commendable results despite the trade situation and some slowdown for China's economic growth.
The company managed to increase sales roughly 40% year over year last quarter, and its operating income climbed 61% versus the prior-year period. E-commerce is a field that's only likely to continue growing, and China is already the world's largest e-commerce market by a wide margin. Investors should know that there could be some bumps in the road with Baozun, but it offers much better prospects than most penny stocks and has the potential to deliver fantastic long-term growth as it adds new brand partners and helps its clients increase sales through its platform.
A real stock for real investors
Rich Smith (Ford): Two stocks sit before you. One just set up shop last year, and probably sells hemp or digital coins, or is called "something.com." The other has been in business for more than a century, and makes something that actual consumers actually buy -- that they need to buy in order to operate in a modern society: cars.
Without knowing the price of either stock, which one are you more inclined to buy?
That's right: the car company.
And when I tell you the car company costs less than 13 times earnings, that its 6% dividend covers nearly half the stock's valuation, and that its estimated growth rate of better than 12% long term more than covers the rest -- and that the stock's name is "Ford," doesn't that make you just a little bit more comfortable in your choice?
I think it should.
Even if the rest of the world has gone ga-ga for faddish companies sporting fast revenue growth but little or no profit, there's still something to be said for owning a piece of a real company that makes real products for real people -- profitably. Particularly if its stock sells for a realistic multiple to those profits, and pays shareholders a rich dividend -- with a promise to keep on paying that dividend.
There's still a place for Ford in your portfolio, and it's a better buy than any penny stock.
About as far away from a penny stock as you could possibly get
Chuck Saletta (Berkshire Hathaway): Penny stocks tend to trade for, well, pennies. They entice buyers who think that because they can buy lots of shares for just a few dollars, they can make a fortune if and when the stock spikes.
The problem with that line of thinking is that stock is cheap to produce -- all it really takes is a vote by the board of directors, and perhaps the filing of some paperwork if the shares will be issued to the public. Without a clear and real business to back up those shares, even $0.0001 per share can be too much to pay for stock in a worthless company.
On the flip side, Berkshire Hathaway's Class A stock traded for as much as $335,900 per share in the past 12 months. That's about as far away from a "penny" price as it gets. Berkshire Hathaway has strong operations and cash flow to back up its shares. In addition to its namesake insurance business, it outright owns the BNSF railroad, Duracell batteries, See's Candies, GEICO, Dairy Queen, Benjamin Moore, and dozens of other businesses. Plus, it has large investments in lots of other companies.
Overall, it trades for around 19 times its earnings and around 1.4 times its book value, making it a reasonable value despite the sky-high share price it commands. For investors interested in the company but unable or unwilling to cough up more than $300,000 to buy a single share, it also has Class B shares that trade at a more reasonable price around $206.
Those Class B shares each carry around 1/1,500 the economic value of the A shares -- and an even smaller portion of the voting rights. Still, they do provide ordinary investors the opportunity to own a stake in one of the strongest companies around.
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Chuck Saletta has no position in any of the stocks mentioned. Keith Noonan owns shares of Baozun. Rich Smith owns shares of Baozun. The Motley Fool recommends Baozun and Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.