Penny stocks can be very tempting for investors. Like a lottery ticket, they promise massive rewards for minimal investment. Unfortunately, like lottery tickets, many penny stocks ultimately lose money, leaving you worse off than if you'd picked a more stable investment.
We know that some investors have higher risk tolerance than others, so we asked three of our Motley Fool contributors what stocks they'd recommend instead of penny stocks. They came back with Guardant Health (NASDAQ: GH), BlackBerry (NYSE: BB), and Tellurian (NASDAQ: TELL). Here's why they think these three stocks are perfect alternatives for investors who are intrigued by the high risk/high reward promise of penny stocks.
Penny stocks promise big rewards, but so do these top picks. Image source: Getty Images.
This expensive stock could be cheap
Keith Speights (Guardant Health): If you're the kind of investor who would consider buying penny stocks, you're no doubt looking for a cheap way to invest in stocks that hold the potential for huge gains. Guardant Health is by no means a penny stock -- its share price tops $80. However, it could deliver explosive gains over the long run. And although it looks expensive now, within a few years the stock's current price could look downright cheap in hindsight.
Guardant Health is a pioneer in the development of liquid biopsies -- blood tests that detect cancer by identifying tiny fragments of DNA that break away from tumors or fully intact tumor cells that have separated from the main tumor.
The company's Guardant360 product helps match cancer patients with the best treatment alternative. Another product, GuardantOmni, enables drugmakers to screen patients for clinical trials of cancer drugs. Guardant Health's newest liquid biopsy product, the Lunar DNA tests, can detect cancer in its early stages and when it recurs.
These products, particularly the Lunar tests, are still in their infancy. But Guardant Health's revenue is skyrocketing. Some analysts think the liquid biopsy market in the U.S. alone could top $100 billion in the future. Guardant Health projects that its current products together have a potential market of more than $30 billion -- in just the United States.
With a market cap of more than $7.5 billion, Guardant Health looks really expensive, especially considering the company isn't profitable. But with a massive potential market, this stock should be on aggressive investors' radar screens.
A defeated tech giant's second act
Leo Sun (BlackBerry): Many investors abandoned BlackBerry after it lost the smartphone market to iPhones and Android devices. But under CEO John Chen, who took the helm in 2013, BlackBerry gradually evolved into an enterprise software and patent licensing company.
That transformation was painful and required the elimination of its first-party phones and weaker software segments like BlackBerry Messenger, but it finally paid off this year, when BlackBerry's revenue rose year over year in the fourth quarter -- marking its first top-line growth in years.
That recovery continued in the first quarter, as its revenue rose 23% annually to $267 million.Much of that growth was attributed to its acquisition of cybersecurity firm Cylance, and that acquisition caused it to post a GAAP loss for the quarter. But excluding those one-time charges, BlackBerry still topped expectations with a non-GAAP profit of a penny per share.
BlackBerry isn't out of the woods yet, but it has a solid foothold in the enterprise software market with its security and mobility management services, its embedded OS QNX dominates the automotive market, and it's generating a healthy stream of revenue from its patent licensing unit.
Analysts expect BlackBerry's revenue to rise 24% this year, but for its adjusted earnings to decline 71%. However, they also expect those numbers to stabilize next year as BlackBerry continues to expand its software, subscription, and patent licensing businesses. BlackBerry's stock isn't cheap at nearly 40 times forward earnings, but that multiple could quickly contract as its earnings growth stabilizes -- which makes it a much more appealing pick than a penny stock.
An industry -- and a stock -- poised to explode
John Bromels (Tellurian): As Keith mentioned, investors considering penny stocks are probably willing to accept significant risk in exchange for the chance at a big payout. That's why I feel comfortable recommending liquefied natural gas (LNG) hopeful Tellurian to you. More conservative investors would probably want to avoid the stock like the plague.
Like many penny stocks, Tellurian is a speculative investment. The company has big plans for growth, but first it has to jump through a lot of hoops. If it stumbles, its investors will be left holding the bag. But here's why I think Tellurian has a good chance of paying off for those who buy in now.
Tellurian was founded in 2016 by a group of natural gas industry insiders who looked at market trends and believed that the U.S. would soon become a major exporter of natural gas. And the way to export natural gas to overseas markets is to liquefy it and load it aboard a ship at an export terminal. While many companies focus on one part of that equation -- either drilling for the gas, transporting it down a pipe, or running the terminal -- Tellurian hopes to become an integrated company, controlling all three aspects.
The company's major focus right now is a pipeline-and-terminal combo called the Driftwood project. It's been successful at getting regulatory approvals for the massive project, but now it needs to secure the financing. Considering that the whole thing is going to cost about $28 billion, that's no small feat for a company whose revenue over the past 12 months was just $8.4 million.
The good news is that Tellurian has already secured a major investment from French energy giant Total, and an unspecified commitment from India's Petronet. The more commitments that come in, the higher the stock price -- currently trading between $8 and $9 a share -- is likely to climb. And once Driftwood comes online, the sky's the limit. If, of course, it happens.
Tellurian's management has certainly been right so far about where the LNG market is heading. Now it has to execute. It's a risk, but not nearly as risky as many penny stocks.
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John Bromels has no position in any of the stocks mentioned. Keith Speights owns shares of Guardant Health. Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Guardant Health. The Motley Fool recommends BlackBerry. The Motley Fool has a disclosure policy.