[Editor’s note: This story was previously published in November 2018. It has since been updated and republished.]
Penny stocks are often dangerous for individual investors. Generally described as stocks with a price under $5, the group usually consists of quite a few fallen angels and growth stocks that haven’t reached, and may never 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 seven penny stocks that could provide solid returns for investors going forward.
Source: Philadelphia 76ers Via Flickr
Chesapeake Energy (CHK)
I’ve had an on-again, off-again attraction to Chesapeake Energy (NYSE:CHK) over the past couple of years. 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 $2.77, down nearly 18% over the past 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 have picked up recently, with CHK beating or meeting earnings consensus in the past nine quarters. With Chesapeake Energy’s earnings incoming at the end of February, there are big potential rewards here.
Further, a continuation of oil’s move higher in 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.
Castle Brands (ROX)
To be honest, I’m not completely sold on Castle Brands (NYSEAMERICAN:ROX) at its current price of 86 cents. And with ROX stock down 24% over the past year, it certainly seems like the market has determined the stock was trading at a premium to fair value. That said, there’s still some good news here, and it’s still an interesting play on U.S. spirits.
Castle’s Gosling brand creates both dark rum and ginger beer, which make the increasingly popular “Dark ‘N’ Stormy” drink. The Jefferson bourbon brand continues to grow nicely, with Castle’s whiskey portfolio (which includes smaller Irish offerings) growing revenue 20% in fiscal 2018.
Profits still are slim, but margins are increasing as revenue continues to grow. Management is well-incentivized to continue that growth. And the clear end game here is a sale to a larger spirits company like Diageo (NYSE:DEO) or Constellation Brands (NYSE:STZ, NYSE:STZ.B).
If ROX stays on its current trend, it should be able to eventually jumpstart a rally.
Source: M01229 via Flickr
Sportsman’s Warehouse (SPWH)
Sportsman’s Warehouse (NASDAQ:SPWH) only barely makes this list since its current price of $5.08 is just above the $5 penny stock cutoff limit. But SPWH does look like a nice value here. 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 lapped the impact of the election, as shown by its 3.4% same-store sales growth in its first quarter after the election. A debt refinancing lowers interest costs. And yet, SPWH trades at just 7.5X next year’s consensus EPS.
There’s a lot to like here, particularly for investors bullish on brick-and-mortar retailers. If those investors like low-handle stocks, all the better.
Limelight Networks (LLNW)
Limelight Networks (NASDAQ:LLNW) has executed a nice turnaround of late — and LLNW stock has responded in kind. The internet content delivery provider is a small fish compared to industry leader Akamai Technologies (NASDAQ:AKAM) — but it’s making progress. Revenue is expected to rise 6% this year and 11% the next, with earnings growing at a long-term rate of 15%.
LLNW looks rather expensive on a P/E basis, but margins are thin and EV/EBITDA multiples are favorable. With a recent pullback to $3.06, 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.
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.
So PLUG’s bull case is a classic “this time is different” argument — which is always tenuous. But there is some good news here. Plug Power has signed deals with Walmart (NYSE:WMT) in 2014 and with Amazon.com (NASDAQ:AMZN) in 2017. What’s more, it joined forces with FedEx (NYSE:FDX) in May 2017. 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 growth of nearly 40% expected this year.
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 $1.33 could move much higher.
DHX Media (DHXM)
DHX Media (NASDAQ:DHXM) has had an ugly one-year period as a stock, down 51%. Debt continues to be a problem for DHX Media, with a debt-equity ratio of 108%! $550 million in long-term debt as of the most recent quarter doesn’t help … but at $1.99, with a market cap around $270 million, there is some reason for optimism.
First, DHX added the Peanuts intellectual property to its portfolio in a deal with Iconix Brand Group (NASDAQ:ICON). That adds to the existing portfolio of Teletubbies, Inspector Gadget, Yo Gabba Gabba! and YouTube content provider WildBrain. DHX then sold 39% of Peanuts to Sony (NYSE:SNE), allowing it to reduce debt while bringing a high-quality partner on board.
A strategic review continues, as DHX looks to to further drive cost savings and reduce debt. And in a cord-cutting world where content may become increasingly valuable, the company should have some options.
This is a high-risk play, as the long decline in its chart shows. ICON has dropped over 99% in the past five years due to too much debt and too weak a portfolio. But DHX should be able to avoid that fate — and potentially drive nice gains in DHXM stock.
Denison Mines (DNN)
I’m not a fan of mining stocks, as I’ve written in the past. But if investors want to take a stab at the sector, then small, 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.
As of this writing, Vince Martin has no positions in any securities mentioned.
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