Penny stocks can be tempting because of their seemingly endless upside. But the reality is that they're high-risk gambling in the stock market, and there are ways to take a risk without buying an unknown commodity.
Three of our contributors put together a list of their favorite stocks to buy instead of penny stocks, and Blue Apron Holdings Inc (NYSE: APRN), Aphria Inc (NYSE: APHA), and Lyft Inc (NASDAQ: LYFT) topped the list. They have a lot of upside if their businesses go right and could generate much better returns than penny stocks.
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The maligned meal kit maker
Leo Sun (Blue Apron): Blue Apron's stock costs just a little more than $1, but it might offer better returns than a penny stock for three reasons. First, the maligned meal kit maker trades at roughly a third of Wall Street's projected sales this year. Second, over a fifth of its shares are currently being shorted. Those two facts indicate that the stock could rally sharply on any positive news.
Third, Blue Apron recently hired Linda Findley Kozlowski, the former chief operating officer of Etsy, as its new CEO. Kozlowski oversaw a remarkable turnaround at Etsy, the artisan marketplace that was once considered Amazon's next victim. Etsy and Blue Apron run completely different businesses, but Kozlowski's track record offers Blue Apron's investors a glimmer of hope.
Blue Apron's total number of customers and revenue plunged 25% annually last quarter, and it's unlikely that those numbers will rebound to positive territory anytime soon. The company doesn't have a meaningful moat against its competitors since it basically sells overpriced boxes of groceries, and former CEO Brian Dickerson's attempts to narrow its losses by cutting costs (especially marketing expenses) reduced the brand's visibility.
Kozlowski hasn't said much about her turnaround plans for Blue Apron, but if she starts spending more money on marketing, new innovations, or even acquisitions, Blue Apron might survive and evolve into a better-diversified company. I'm not saying that will happen, but Blue Apron's stock could have a lot of room to run if it does.
A bargain marijuana stock to buy?
Todd Campbell (Aphria): The argument goes: Buy a lot of shares in a penny stock, and you'll get rich when its share price goes up. The problem is, most penny stocks are cheap for a reason. If a penny stock's share price increases, it's unlikely to last. Investing your hard-earned money into companies like that isn't a recipe for market-beating returns.
Instead, consider focusing on companies disrupting big markets that have fallen on tough times. Especially, if those tough times aren't nearly as bad as they seem. One stock that may fit that description is Aphria, Canada's third-largest marijuana company. Its shares tumbled this week because its sales were lower last quarter than industry watchers were expecting.
Missing estimates isn't a good thing, but sellers might be better off thinking long term when it comes to this company and its opportunity. After all, Aphria's $74 million in sales was up a whopping 617% from one year ago, despite falling about $10 million shy of expectations.
Because Canada's marijuana market is worth 6 billion Canadian dollars annually, and the process of shifting sales to regulated, legal marijuana marketplaces from the black market is only in its infancy, it could be wrong to focus too much on last quarter's report; particularly since Aphria's opportunity isn't limited to Canada.
Globally, the marijuana market is worth $150 billion per year, according to the United Nations, including $50 billion in the United States. Most of that spending is still done illegally, but momentum to legalize marijuana is increasing worldwide, so there's a tremendous opportunity for marijuana stocks like Aphria.
Admittedly, Aphria's got some black eyes. Allegations that it paid too much for acquisitions last year resulted in an internal investigation, a decision by its CEO to step down, and CA$50 million impairment charge. However, sales are set to climb markedly this year because of a tripling of its marijuana production, and new management might be just what it needs to capture more market share. If so, then picking up shares from the bargain bin now could prove more profitable than buying a penny stock.
Image source: Getty Images.
A better bet on the future
Travis Hoium (Lyft): Forget the $911 million loss in 2018 or the second place that Lyft has behind Uber -- I think Lyft will be a truly transformative company over the next decade. The company is not only a leader in ride-sharing today, but it's also developing self-driving vehicles and the underlying robotic transportation ecosystem that could change the way we move.
Whether you're looking at Lyft or Uber, ride-sharing is just the start of the business. They're trying to build a two-sided market with a large customer base who will ultimately rely on them for rides from self-driving vehicles, for food delivery, and many other services. The other side of the market is drivers, who may ultimately be replaced by self-driving vehicles.
The most important piece of this business is building the network of customers who will ultimately be the drivers of demand long term. With a base of customers, Lyft will have money to invest in infrastructure, which can be leveraged to improve safety and lower costs.
The risk for Lyft is if competitors like General Motors or Google's Waymo start building self-driving networks before Lyft can. They may be able to break into the market and build a customer base to rival Lyft. However, I think it's more likely that technology won't be the differentiator, but rather the trust Lyft has built with customers to get them from point A to point B.
Disruption isn't always a straight line to success, and in the tech industry, it can be costly. But if Lyft is one of a handful of autonomous transportation companies left standing a decade from now, it will have been a huge winner for investors.
Great stocks from different ends of the market
Blue Apron, Aphria, and Lyft may come from very different places in the market, but they're all disrupting the status quo and have a lot of potential for growth. Despite any risks, they're much better bets than most penny stocks investors might be considering today.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Amazon. Timothy Green owns shares of General Motors. Travis Hoium has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A and C shares), Amazon, and Etsy. The Motley Fool has a disclosure policy.