We recently published a list of 10 Best US Stocks to Buy Under $5. In this article, we are going to take a look at where Transocean LTD (NYSE:RIG) stands against the other stocks to buy under $5.
Investors are becoming increasingly nervous amid a slowing U.S. economy. Signs of weakness in consumer spending and manufacturing points to an economy that is overheating amid the high interest rate environment
In August, nonfarm payrolls grew by 142,000, an increase from 89,000 in July but short of the 161,000 forecast. The unemployment rate decreased to 4.2%, while the “real” unemployment rate climbed to 7.9%, the highest since October 2021.
According to Dan North, an economist at Allianz Trade, the recent string of economic data has been disappointing, signaling something is wrong. A slowing economy always takes a significant toll on investors sentiments in the equity market.
The slowdown comes when the stock market is at a pivotal level heading into the year-end. The leading market indices are hovering close to all-time highs amid a slowing economy that needs the U.S. Federal Reserve to tweak its monetary policy.
The earnings season has also added another caveat seen by increased volatility. After months of blockbuster gains, significant stock sell-offs linked to artificial intelligence and semiconductors have come into play. Geopolitical worries, the forthcoming presidential race, and shifts in Federal Reserve strategy usher in uncertainty.
Valuations have gotten out of hand as most stocks are trading way above their historical highs. Given that the stock market experiences about four deep pullbacks of more than 5% every year, there is growing concern that one could be on the way heading into the year-end.
Appearing in an interview on CNBC, George Lagarias, the head economist at Forvis Mazars, stated that although it’s impossible to predict the magnitude of the Federal Reserve’s upcoming rate adjustment, he is in favor of a 25-basis point reduction. Analysts do not see the need for a 50 basis point or more reduction as it could confuse the markets and the economy, portraying a sense of urgency.
A more profound interest rate cut would take a significant toll on stocks trading at premium valuations as they would be the hardest hit with heightened volatility. On the other hand, emerging stocks that haven’t caught the Street’s attention yet could offer some good buying opportunities.
Currently, the market appears favorable for the growth of penny stocks and small-cap companies. Chris Retzler, portfolio manager at Needham Small Cap Growth Fund, suggests that while smaller companies are volatile, their long-term outlook is positive. He anticipates a market broadening in the second half of 2024, which could benefit smaller companies that have recently underperformed.
Retzler highlights the liquidity of smaller companies as a key growth factor. As funds shift from larger to smaller companies, many small-cap stocks may see significant price increases. Additionally, the expectation of lower interest rates over the next year is favorable for penny stocks, which require less capital to see price and valuation growth.
Investing in penny stocks or small-cap companies can be risky due to their volatility and limited historical data. However, these high-risk investments can also offer substantial rewards for those with a higher risk tolerance. While many of these companies face significant issues, some are hidden gems.
Our Methodology
We screened for US-listed companies that are trading under $5 and picked the stocks that were the most popular among elite hedge funds and that analysts were bullish on. The stocks are ranked in ascending order of the number of hedge funds that have stakes in them.
At Insider Monkey we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
An aerial view of an oil rig with drillers in hard hats working on the platform.
Transocean LTD (NYSE:RIG)
Number of Hedge Fund Holders: 42
Current Share Price: $4.12
Transocean LTD (NYSE:RIG) is an oil and gas company providing offshore drilling services for oil and gas wells worldwide. It operates a fleet of mobile offshore drilling units comprising ultra-deep-water and harsh environment floaters. Its primary clients are integrated energy companies. Government-owned or government-controlled energy companies.
It is one of the best US stocks to buy under $5 as it is currently trading at a discount coming under pressure on the overall industry, facing challenges ranging from fluctuating oil prices to increased regulatory scrutiny. Deteriorating market conditions have pushed the stocks’ valuations to the lowest level.
Amid the deteriorating conditions, Transocean LTD (NYSE:RIG) continues to deliver solid financial results as it also inks multi-million dollar deals that should allow it to generate long-term value. It delivered an adjusted EBITDA of $284 million and contract drilling revenues of $861 million for Q2 2024. Its revenue growth over the past year has been strong at 15.07%
While the company posted a net loss of $123 million in the quarter, it inked a $123 million contract with BP that should strengthen its revenue base. It has also inked a 2-well contract with Beacon Offshore Energy.
Transocean LTD (NYSE:RIG) has also inked six new contracts, including three lucrative deals in the U.S. Gulf of Mexico, highlighting the robust demand for offshore drilling services. This is further supported by Transocean’s substantial $8.8 billion backlog, indicating a healthy pipeline of future work. Additionally, the broader energy sector, particularly offshore drilling, is experiencing positive momentum due to rising oil and gas demand. These factors boosted investor confidence and drove up Transocean LTD (NYSE:RIG)’s stock price.
While the stock trades under $5, it trades at a price-to-earnings multiple of 16, signaling its potential to generate earnings and shareholder value in the future. As of the end of the second quarter of 2024, 42 hedge funds had stakes in Transocean LTD (NYSE:RIG).
Overall RIG ranks 1st on our list of best US stocks to buy under $5. While we acknowledge the potential of RIG as an investment, our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than RIG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.