When picking stocks to buy, I often look for the best stocks under $5 many times. Stocks trading under $5 are not only cheaper, but their low share price often gives them more room to grow. At least, that’s what I’ve experienced.

Often, companies priced under $5 are that way for a good reason. But sometimes, the problems these businesses face are only short term. And so, the low share price can be a lucrative opportunity for my portfolio.

It doesn’t always work out, of course, since the company might be too far gone. But if an investor buys a cheap stock before it makes a comeback, the returns can be pretty lucrative. Although it’s important to remember that a low share price doesn’t necessarily mean a stock is cheap. With that in mind, let’s take a look at my best stocks to buy under $5.

Best Stocks #1: Telefonica, S.A

Telefonica (NYSE:TEF) is one of the largest telecom companies in the world and provides its services across Europe and Latin America. Telefonica is my best stock to buy under $5. Why? Let me explain.

In my opinion, the company is an innovative market leader. It provides mobile & fixed telecommunication services, as well as specialised equipment. In addition, it has a plethora of other offerings in its portfolio, including internet & broadband services, leased lines, virtual private networks, fibre optic infrastructure, and hosting solutions. Needless to say, it does a lot.

But it seems the management team are continuing to expand into even more projects. More recently, it launched its own music streaming service – Movistar Musica. And it looks like the company is also gearing up for the 5G revolution following the recently signed contract with Nokia and Ericson to develop a 5G SA Radio Network.

It’s certainly not the only player in the space. And consequently faces fierce competition from rival firms such as Vodafone, Orange, Telenor, BT Group, and Nokia. Staying ahead of the curve is an expensive endeavour that requires constant innovation through research and development. Unfortunately, that doesn’t always yield fruit. But with $4.94bn of cash on the books, Telefonica looks more than capable of affording it.

Best Stocks #2: Ideanomics 

Ideanomics (NASDAQ:IDEX) is my second best stock under $5 to buy. The finance company is pushing for the adoption of electric vehicles while simultaneously developing new financial services and technologies. Ideanomics is divided into two segments. Its Capital division provides fintech services, while the Mobility division offers solutions for the procurement, financing, charging and energy management needs of commercial electric vehicle operators.

The company recently acquired US Hybrid and Solectrac. US Hybrid is a company that manufactures and distributes electric powertrain components and fuel cell engines for medium and heavy-duty commercial fleet applications. In contrast, Solectrac is an electric tractor maker.

Alliance Data Systems, Flywire and Envestnet are its main competitors. Aside from these competitors, there are other risks to be aware of. Ideanomics requires a lot of financing to continue operating smoothly. It is, after all, unprofitable. If it fails to keep the money flowing from creditors, the share price could be significantly adversely affected. Ideanomics is currently trading around $3.

Best Stock #3: Verastem

Verastem (NASDAQ:VSTM) is my final best stock under $5 to buy. It is a development-stage pharmaceutical company focused on developing and commercialising new drugs to improve the lives of cancer patients. The company already has some products in the market while others are still in trial stages. To better its operations, it entered into a strategic partnership with Pfizer and Chugai Pharmaceutical.

Verastem’s competitors include Amgen, Biogen, and Alexion Pharmaceuticals. But like all pharmaceutical companies, Verastem needs to get regulatory approval for its products. This is easier said than done. Even drugs that make it as far as phase III trials are often rejected by regulators. Needless to say, if any of its leading projects fail to make it to market, the stock could quickly plummet.

Are these the best stocks to buy now?

All these companies have their peculiar risks and have performed differently in the last 12 months. But regardless of their short-term performance, I believe that they all have long-term growth potential. I already have Ideanomics in my portfolio. Perhaps it’s time I add Telefonica and Versatem as well.