Cheap ASX-listed shares under $5: How to pick the next AfterPay

Investors looking for the next Afterpay can find ways to grow their wealth with these 1500 stocks under $5. See the full list.

Australian investors chasing the next Afterpay could find their fortune in more than 1500 cheap stocks, but experts have warned to tread carefully.

New data from Nabtrade shows there are 1526 ASX-listed stocks up for grabs, all with an average price of under $5 share.

Buy now, pay later companies Humm and Openpay, telco giant Telstra, travel agent Webjet, and Australia’s national airline Qantas are among the 100 most popular ASX-listed stocks, based on the number of trades placed over the past 30 days.

Nabtrade did not release the exact number of trades citing commercial sensitivity, but each had an average price of under $5 per share over the same period.

But just because those stocks made the top 100 bargain buys, does not mean necessarily mean their share prices will soar.

Most professional investors don’t just look at the absolute price of a share. They use a range of measures to gauge whether a stock is “cheap” or “expensive”.

This includes measures such as price-to-earnings ratios (how much profit a company makes compared to the price of a stock); dividend payouts; and other fundamentals such as return on equity or 12-month trading range.

Nabtrade’s director of investor behaviour Gemma Dale said the key was to look for innovative companies in industries that are growing quickly.

“If you do use that ‘I’m looking for the next Afterpay’ mentality, what you are looking for is a company with extraordinary growth potential,” Ms Dale said.

Nabtrade’s director of investor behaviour Gemma Dale said it was important to look for innovative companies in industries that are growing quickly. Picture: Supplied

Afterpay’s share price has boomed since it listed on the local market in 2017, when it debuted at about $2. Across the past 12 months, it has grown from $12 and now trades at over $100, despite not yet being profitable.

Ms Dale said the homegrown fintech company “created a new category”, and that was consistent with what many companies who have experienced the biggest growth over the past two decades had also done.

“So when you look at a cheap stock, the you need to consider what industry is it in, what does it sell, and is that a fast growing proposition,” she said.

She said it was important to establish whether these companies would turn a profit in the future, and shareholders should also feel confident that the market held the same view.

Ms Dale said investors looking for companies with big growth potential often looked to fintech and biotech firms, and small cap mines were also attracting attention.

“There are plenty of under $5 companies, such as Qantas for example. They are highly-reputable, well-established companies that will continue to turn a profit … but they [their share prices] aren’t going to increase by 10 times in the next five years,” she said.

She said first-timers and experienced investors should read company-specific research that was often available on trading platforms to better understand what the company does, how they get paid and how profitable they are.

And if a company wasn’t yet making money it was OK to make a speculative investment, but establishing an exit strategy was essential in case it didn’t succeed, she added.

IG markets analyst Kyle Rodda said tech firms specialising in anything from hardware to software, buy now, pay later companies and biotech presented the best growth opportunities.

Mr Rodda said this was due to two key reasons: because in a “low growth world, value is created by maximising efficiencies and reducing costs”, and because growth in developed countries generally “comes from advances in technology.”

He said investors the biggest risks to traders were “momentum investing” and the “fear of missing out”.

“Sometimes people confuse surging prices as an indicator of a great value company, and buy in the fear that they are missing out on the next big thing.”

He said a history of rapid revenue growth with clear prospects for more, and a company’s market share could help in identifying whether it had strong future prospects.

“There are also macro considerations, like where we are in the economic cycle, and what sort of interest rate environment we are in – lower long term rates are good for growth investments,” Mr Rodda said.

WHAT THE EXPERTS SAY

NATHAN BELL, PORTFOLIO MANAGER, INVESTSMART

Investsmart Portfolio Manager, Nathan Bell. Picture: Supplied

BUY

FDV (Frontier Digital Ventures) | Average price: $1.25

EXP (Experience Co) | Average price: $0.28

ABB (Aussie Broadband) | Average price: $2.70

S32 (South32) | Average price: $2.98

TGP (360 Capital) | Average price: $0.92

AVOID

CTT (Cettire) | Average price: $2.13

MSB (Mesoblast) Average price: $1.87

ASB (Austal) | Average price: $2.29

LBY (Laybuy Group Holdings) | Average price: $0.62

NUF (Nufarm) | Average price: $4.86

Top tip: “The key things to look for in a potential high growth winner are a large potential market, which usually means being successful in the US. Preferably having management (the founder) with the bulk of their net worth invested in the company. The company doesn’t necessarily need to be profitable, but it has to have a clear path to profitability and the cash to invest to get there. Usually the company will need to have high market share, otherwise profits will always be under pressure from competitors.”

JUN BEI LIU, PORTFOLIO MANAGER, TRIBECA INVESTMENT PARTNERS

Tribeca Investment Partners portfolio manager, Jun Bei Liu

BUY

QAN (Qantas) | Average price: $4.69

CWY (Cleanaway Waste Management) | Average price: $2.74

TYR (Tyro Payments) | Average price: $3.69

NEC (Nine Entertainment Co) | Average price: $2.99

SDF (Steadfast Group) | Average price: $3.96

AVOID

NXL (Nuix Ltd) | Average price: $2.99

PRN (Perenti Global Ltd) | Average price: $0.70

NEA (Nearmap Ltd) | Average price: $1.76

Top tip: “The key to find those growth winners is about truly understand the business, its potential addressable market and most importantly management track record of execution. Growth businesses often trades on expensive valuations as analysts consistently underestimates future earnings. Word of warning though, growth leaders are hard to come by, out of every hundred, there are only a handful of them reaches scale and become global leaders. Its important of investors not to chase hot stocks and do their own research.”

Originally published as Cheap ASX-listed shares under $5: How to pick the next AfterPay