Buying stocks based on their price alone is no kind of investing decision.
Yet with all other factors being equal, many investors prefer to own a larger number of a lower-priced stock compared to a smaller number of more expensive stocks.
As an example, given a choice between owning 11 shares of CSL Limited (ASX: CSL) for ~$990, and 100 shares of Carsales.Com Ltd (ASX: CAR) for $983, many investors would take Carsales every time – despite the fact that the two parcels of shares earn an almost identical amount of money.
It's a psychological bias and an investing flaw, yet one that can be relatively harmless for investors that buy the right companies. For those of you out there who love your lower-priced stocks, I've compiled a list of three companies under $5 that will power your portfolio over the long term:
Retail Food Group Limited (ASX: RFG) – last traded at $4.27, yields 5.8%
The target of my most recent purchase, Retail Food Group shares are down 11% for the year despite Earnings Per Share rising 35% in this time. Although the company will spend several million this year integrating a number of recent purchases, the expected cost savings over the long term will be significant.
Additionally, the company has established a joint venture to take its Gloria Jean's franchise into China, and 25% of its earnings before tax are expected to come from its international markets by 2018.
Trading on a Price to Earnings (P/E) ratio of just 12 – cheaper than the banks – Retail Food Group is an outstanding long-term purchase today.
Collection House Limited (ASX: CLH) – last traded at $2.35, yields 4.1%
Debt collector Collection House Limited has successfully grown revenues and dividends every year for the past 8 years, and its winning streak is expected to continue again this year with management "confident that despite any prevailing economic conditions we can continue to achieve above market growth and continue to increase shareholder value".
Trading on a P/E of 14 – the ASX average – yet with a sterling track record and growth 'despite any prevailing economic conditions', Collection House is priced for success and a great buy at today's prices.
Lifehealthcare Group Ltd (ASX: LHC) – last traded at $3.03, yields 5.5%
Finally Lifehealthcare is the most conventionally expensive of today's stocks, with a P/E of 24 based on its forecast earnings for this financial year.
However, investors love their healthcare stocks and the company's strong dividend combined with its intention to grow incrementally by acquisition have inflated its value. Recent acquisitions look to be a sound way to expand the company's product range and there is ample room for upside as recent prices of $3.50 and broker recommendations as high as $3.90 indicate.
Assuming no upsets, Lifehealthcare looks like decent value at today's prices.
