The price of a stock alone doesn't necessarily communicate anything about the underlying business. A stock priced at $200 per share could be a much more attractive investment than one priced at $2 per share. That said, lower share prices tend to be a hallmark of small-cap companies, and small-cap companies tend to outperform the market on average (although they're also accompanied by higher risk).
Investors looking for low-priced stocks with the potential for above-average returns might want to take a closer look at solar hardware leader Enphase Energy (NASDAQ: ENPH) and fertilizer manufacturer Intrepid Potash (NYSE: IPI). Both entered 2019 with considerable momentum that is likely to continue for the foreseeable future.
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A leader in solar energy
Enphase Energy is riding the exponential growth curve of solar energy to new heights. The company supplies various hardware components that help solar modules and solar power systems operate more efficiently. That mostly comprises microinverters, including an exclusive supply deal with solar panel manufacturer SunPower, although Enphase is looking to expand its presence in residential solar with integrated power systems of its own.
The company turned in a record year of operations in 2018. Enphase Energy reported operating income of $1.6 million for the year, compared to an operating loss of over $39 million in 2017. It achieved that incredible year-over-year improvement by growing revenue 10%, lowering cost of goods sold, and decreasing operating expenses.
It's just getting started. The business delivered an operating margin of 5% in the fourth quarter of 2018. While that was significant enough to erase the operating losses accumulated from the first nine months of the year, management believes its business can achieve an operating margin of at least 10%. Achieving that benchmark could have Enphase Energy churning out $50 million in annual operating income within a few short years.
That's something investors with a long-term mindset won't want to overlook, although there's plenty to look forward to in the short run, too. Shares currently trade at 21 times future earnings after analysts recently increased their earnings estimates for Enphase. That's relatively cheap considering the company's growth potential. Throw in impressive growth for solar energy, which provided around 2.5% of all electricity in the United States in 2018, and the highly anticipated rollout of an expanded energy storage portfolio for residential customers, which is now expected to launch in late 2019, and Enphase Energy is an attractive stock under $10.
Quietly improving margins for a fertilizer price recovery
The global potash fertilizer market is highly consolidated. Nearly all of the world's potash is sourced from just 18 deposits, while the nine largest producers account for 94% of global output. That makes it easy to overlook Intrepid Potash, which weighs in at a market cap of just $500 million. But there are solid reasons to give it a closer look.
All three of the company's operating segments -- potash, Trio, and oilfield solutions -- delivered impressive year-over-year operating improvements in 2018. The potash segment, by far the most important, delivered a $13.4 million improvement in gross margin year over year. The Trio segment, named after the company's brand of a specialty fertilizer called langbeinite, enjoyed a $5.7 million boost from 2017. And the oilfield solutions segment saw gross profit jump $7.2 million from the year before.
That drove full-year 2018 operating income to $15.5 million, compared to an operating loss of $14 million in 2017. Booming operations and greatly reduced interest expense following debt repayments resulted in net income of $11.8 million in 2018, compared to a net loss of $22.5 million in 2017. Operating cash flow soared 285% to over $64 million in that span.
The newfound financial strength couldn't have come at a better time for Intrepid Potash and its shareholders. Potash fertilizer selling prices are, finally, slowly inching higher after years in the gutter. Considering that sour market fundamentals were the catalyst behind the company's ruthless focus on operating efficiency, a price recovery holds tremendous upside potential for the business that's operating at the lowest cost structure in its history.
Meanwhile, the Trio segment reported its first quarterly gross profit in years during the fourth quarter of 2018. That's no minor detail considering the specialty unit delivered a gross loss of $9.5 million in 2017.
Intrepid Potash has also found success diversifying its business with oil and gas customers. While it has always sold brine byproducts in small amounts to energy producers, it recently began selling some of its excess water reserves (needed for its potash production method) to drillers in the Permian Basin (who need it for drilling). It just so happens that the company's potash and water reserves are located in and near the Permian Basin, which makes it a no-brainer opportunity. So does the segment's 75% gross margin.
The business appears poised to continue improving. Shares currently trade at just 20 times future earnings and 1.2 times book value, roughly in line with global leader Nutrien. While the much larger peer pays a healthy dividend, the smaller producer's quickly expanding water sales and rapidly improving fertilizer business may provide more upside to individual investors in the long run.
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