Penny stocks are often dangerous for individual investors. Generally described as stocks with a price under $5, the group usually consists of quite a stocks that haven’t reached, and potentially won’t reach, their potential. But there are diamonds in the rough. During the financial crisis, several stocks hit penny stock status. Pier 1 Imports (NYSE:PIR) went from 13 cents to over $20 before a long decline the past few years. Dollar Thrifty Automotive bottomed at 60 cents, and sold itself in 2013 to Hertz (NYSE:HTZ) for $87.50 a share.
Those diamonds are more difficult to find in a market near all-time highs, but they’re still out there. Here are five penny stocks that could provide solid returns for investors going forward.
1) Chesapeake Energy (CHK)
Chesapeake is still trying to recover from the oil and gas bust that left it with nearly $10 billion in debt and much lower revenues. Progress has been choppy, both for the business and the stock. CHK stock is now trading at $3.46, down nearly 15% this year.
Investors need to understand the risks here. The debt is a concern, particularly if oil and/or gas prices start falling again. Earnings reports haven’t been great. But there are big potential rewards here, too. The sale of assets in the Utica shale will shave about $2 billion off the debt load. CEO Doug Lawler said that after its strong Q2 results in the Powder Basin, it would replace the lost profits from the Utica acreage within a year. Any move higher in oil or gas prices should disproportionately benefit CHK relative to a major like Exxon Mobil (NYSE:XOM).
In short, CHK now looks like a classic penny stock with high risk and high reward, even if long-term shareholders certainly would prefer that it wasn’t.
2) Denison Mines (DNN)
developing miners traditionally offer the best chances for big gains. And Denison Mines (NYSEAMERICAN:DNN) fits that bill. Denison’s properties are located in the Athabasca Basin, in northern Canada (Alberta and Saskatchewan). It’s targeting uranium resources at its properties — and uranium prices are starting to tick up. The closure of a mine by giant Cameco Corp (NYSE:CCJ) presents a near-term catalyst to those prices — and the discounted fair value of Denison’s mines.
Obviously, there is a ton of risk here. Denison is unprofitable, and likely will need to raise more capital down the line. But DNN actually could provide what mining stocks are supposed to: leverage to the price of uranium. With fundamentals perhaps supporting some upside in the metal, DNN could follow.
3) Plug Power (PLUG)
Clean energy historically has been a graveyard for investor capital, and hydrogen vehicle developer Plug Power (NASDAQ:PLUG) hasn’t been any different. The stock trades well below peaks from last decade, and is down about three-quarters from early 2014 levels as well.
Plug Power has signed deals with Walmart (NYSE:WMT) in 2014 and with Amazon.com (NASDAQ:AMZN) last year. It joined forces with FedEx (NYSE:FDX) in May. The company remains unprofitable, but cash burn is slowing, and the company is guiding for profits in the second half (albeit with a ton of adjustments; GAAP earnings remain a long way off). Revenue is growing quickly, with gross revenue up 90% year-over-year in Q1.
PLUG has pivoted toward industrial applications — and there is some promise there. Investors in PLUG will have to be patient, have to tolerate volatility and have to accept risk. But if Plug Power finally can gain some traction, the current share price around $2 could move much higher.
4) Limelight Networks (NASDAQ:LLNW)
The internet content delivery provider is a small fish compared to industry leader Akamai Technologies (NASDAQ:AKAM) — but it’s making progress. Revenue has risen 14% in the first half, with non-GAAP EPS more than doubling.
LLNW looks rather expensive on a P/E basis, but margins are thin and EV/EBITDA multiples are favorable. With a recent pullback to $4.03, a continuation of the recent trend should drive upside in the stock.
With Akamai rebounding amid easing of some industry-wide concerns — notably customers like Netflix (NASDAQ:NFLX) and Facebook (NASDAQ:FB) choosing DIY options — Limelight is positioned to keep double-digit revenue growth intact. That will boost margins and profits — and likely get LLNW out of the penny stock category altogether.
5) Sportsman’s Warehouse (SPWH)
Sportsman’s Warehouse (NASDAQ:SPWH) only barely makes this list since its current price of $5.18 is just above the $5 penny stock cutoff limit. Investors were concerned about weaker firearm sales after the election of Donald Trump. (Perhaps counterintuitively, firearm sales rise under Democratic presidents and fall under Republican administrations.) A reasonably leveraged balance sheet offered another worry.
But SPWH is lapping the impact of the election, as shown by 3.4% same-store sales growth in its first quarter. A debt refinancing lowers interest costs. And yet, after a recent ~15% pullback, SPWH trades at just 7x next year’s consensus EPS.There’s a lot to like here, particularly for investors bullish.
Categories: Stock Markets