In this article, we discuss the 10 best quality penny stocks to buy.

Penny stocks are shares of small companies that usually trade for less than $5 per share. They are often found in smaller or newer businesses and tend to be more volatile and risky because they can rise or fall in value quickly.

Many penny stocks trade on smaller exchanges or over-the-counter (OTC) markets rather than major stock exchanges. While they can offer big rewards if a company grows, they also come with higher risks, as these companies may have unstable finances or less information available to investors.

Most penny stocks usually fall under the small-cap stocks category. However, that is not always the case. Some large companies with high market caps have low share prices due to several factors, even though they are well-established and stable. The most common reason is share dilution.

When a company issues a large number of shares, its share price can be low, even if the company is worth billions overall. We have some companies on our list that fall into the category. This does not necessarily mean the company is struggling or risky like typical penny stocks but the low share price is due to the way its shares are distributed rather than poor performance or instability.

Sustainable Growth Expected in Small Caps Amidst Market Shifts

On July 26, Nathan Moser, Managing Director and Senior Portfolio Manager at Impax Asset Management joined Schwab Network and discussed some long-term possibilities around small-cap stocks. He discussed the recent changes in small-cap stocks and highlighted the positive shift.

He noted that after years of struggles, the recent rise in small caps seems more sustainable, which is driven by strong inflows into ETFs and passive investment vehicles. Moser believes the market’s current move could last for years, despite some short-term volatility, and encouraged buying on any market dips.

Moser pointed out that sectors like regional banks, real estate, and housing have performed well, most likely because investors believe that the Federal Reserve may delay or avoid a recession. He said that the recent rise is just the beginning and compared it to the early stages of a baseball game, with more room for growth in the small-cap sector.

He said, “We’re in the first inning of this move, in my opinion.” However, he advised to keep focus on high-quality, profitable companies due to the risks associated with lower-quality stocks in small caps.

With that, we look at the 10 Best Quality Penny Stocks To Buy.

Our Methodology

For this article, we identified 30 quality penny stocks trading under $5, as of September 3. The stocks we identified are profitable, have real sales, and are expected to remain profitable in the future as well. We narrowed down the list to 10 stocks most widely held by institutional investors. We listed the stocks in ascending order of their hedge fund sentiment.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

10 Best Quality Penny Stocks To Buy

10. Gilat Satellite Networks Ltd. (NASDAQ:GILT)

Stock Price as of September 3: $4.44

Number of Hedge Fund Holders: 10

Gilat Satellite Networks Ltd. (NASDAQ:GILT) is a key player in the global satellite communications sector and offers a wide range of advanced technology solutions. The company specializes in providing comprehensive satellite-based broadband communications, catering to a variety of needs from commercial to defense applications.

Its portfolio includes high-performance satellite terminals, Satellite On-the-Move (SOTM) antennas, Solid State Power Amplifiers (SSPA), and Block Upconverters (BUC), as well as integrated ground systems and cybersecurity services.

The broad range of offerings allows the company to deliver reliable, secure solutions for mission-critical operations across multiple industries, including defense, aerospace, broadcast, government, and critical infrastructure.

In Q2, Gilat Satellite (NASDAQ:GILT) reported a significant increase in revenue, reaching $76.6 million, a 13% rise compared to the same period in 2023. The company also saw its adjusted EBITDA grow by 10%, amounting to $10.1 million. The growth was largely driven by a surge in its defense business, especially following the acquisition of DataPath, which has significantly strengthened its revenue stream.

A significant development for the company was its announcement of acquiring Stellar Blu Solutions in the second quarter. Stellar Blu is recognized for its innovative electronically steerable antennas for the in-flight connectivity market. The acquisition, expected to close around the start of the fourth quarter, is projected to contribute between $120 million and $150 million in revenue by 2025. Once Stellar Blu reaches its production targets, its EBITDA margin is anticipated to exceed 10%. For the fourth quarter of 2024 alone, Stellar Blu is estimated to generate between $25 million and $35 million in revenue.

Gilat Satellite (NASDAQ:GILT) has reiterated its revenue guidance for 2024, forecasting between $305 million and $325 million, which represents an 18% increase at the midpoint compared to the previous year. The company anticipates GAAP operating income to fall between $15 million and $19 million, with adjusted EBITDA expected to be between $40 million and $44 million, which represents a 15% growth at the midpoint.

The company continues to secure significant contracts. In early September, the company received over $12 million in orders from a major satellite operator to expand their global SATCOM network using Gilat’s SkyEdge Family of VSAT Platforms. The contract is set to be fulfilled within the next 12 months.

The company is making substantial strides in expanding its market presence and enhancing its product offerings. With a strong financial performance, strategic acquisitions, and a solid pipeline of contracts, the company is well-positioned for continued growth and success in the industry. The company takes its place among our best quality penny stocks to buy.

As of the second quarter, 10 hedge fund managers had invested in Gilat Satellite (NASDAQ:GILT) and the stakes amounted to $9.121 million. The largest stakeholder among them is Renaissance Technologies with a position valued at $4.82 million, as of June 30.

9. BRF S.A. (NYSE:BRFS)

Stock Price as of September 3: $4.35

Number of Hedge Fund Holders: 10

BRF S.A. (NYSE:BRFS) stands out as a major force in the global food industry and one of Brazil’s largest food processors. The company, established in 1934 through the merger of Sadia and Perdigão, has built a strong presence in the market by raising, producing, and processing poultry and pork.

It also produces a range of other products including fresh meat, processed goods, pasta, margarine, and pet food. Operating across over 150 countries, the company has a portfolio of more than 30 recognized brands such as Sadia, Perdigão, and Qualy.

Its operational footprint is extensive, with over 103 distribution centers and 40 production facilities spread across Brazil and several international locations, including the United Arab Emirates, the Netherlands, and Malaysia. Serving over 300,000 customers and handling more than 500 million deliveries each month, the company demonstrates a significant reach and operational scale.

According to our database, 10 hedge funds held stakes in BRF S.A. (NYSE:BRFS) in the second quarter, with positions worth $135.525 million. Polunin Capital is the biggest shareholder in the company and has a position worth $72.1 million as of Q2.

BRF S.A. (NYSE:BRFS) has shown strong growth in Q2, marking the sixth consecutive quarter of increased profitability. The company achieved a margin of 17.6% and saw revenue rise by 22.3% compared to the same period last year. The growth is attributed to a 5.4% increase in volumes sold, a 16.0% rise in average prices, and favorable effects from the exchange rate on international revenues.

In the domestic market, the company achieved an adjusted EBITDA of R$1.076 billion (1 BRL = US$ 0.18 as of September 3) with a 15.7% margin, showing a 6% year-over-year increase. The company expanded its market presence by adding 10,400 new points of sale, bringing its total to 302,000 customers, which is a 3.6% increase from the previous quarter.

Internationally, it experienced a 17% rise in revenue, supported by a nearly 5% increase in volume and a more than 10% improvement in realized pricing. The performance was driven by stronger pricing in the halal/Gulf region and an enhanced mix of processed food products. The company’s net profit reached R$1.1 billion, and its free cash flow surged to R$1.7 billion, more than double the amount recorded in the previous quarter.

Additionally, BRF S.A. (NYSE:BRFS) has been active in returning value to its shareholders. On August 14, the company approved the acquisition of up to 17 million additional shares as part of its share buyback program, which is set to continue until October 7, 2025. The move is evidence of the company’s commitment to enhancing shareholder value. It is among our best quality penny stocks to buy.

8. Ring Energy, Inc. (NYSE:REI)

Stock Price as of September 3: $1.72

Number of Hedge Fund Holders: 11

Ring Energy, Inc. (NYSE:REI) is an independent exploration and production company with a strong focus on oil and natural gas activities, primarily in the Permian Basin. This region, known for its significant oil output, contributes nearly half of the U.S. daily production, making it a key area for energy development. It takes the 8th spot on our list of the best quality penny stocks to buy.

The U.S. Energy Information Administration (EIA) forecasts that crude oil output in the Permian Basin will average approximately 6.3 million barrels per day in 2024, representing an almost 8% rise compared to 2023. The company targets high-value formations in the Northwest Shelf and Central Basin Platform of West Texas, areas renowned for their oil and liquid-rich reserves.

In the second quarter, the company reported net income of $22.4 million, which is equal to to $0.11 per diluted share, while adjusted net income came in at $23.4 million, or $0.12 per diluted share. The company’s total sales volumes reached 19,786 barrels of oil equivalent per day (BOEPD), marking a 4% increase from the previous quarter and surpassing its guidance. The performance is a clear-cut sign of the company’s ability to exceed production expectations and manage its operations efficiently.

The growth in sales volumes was driven by oil production, which averaged 13,623 barrels per day, a 2% rise from the first quarter. The achievement was 3% above the midpoint of guidance and 2% higher than the high end of expectations.

Ring Energy’s (NYSE:REI) strong production figures have translated into substantial financial benefits. In the first half of 2024, the company generated $37 million in adjusted free cash flow, despite facing lower realized prices for its non-oil production.

This marked a 60% increase in free cash flow compared to the previous year, largely driven by the acquisition of Founders, which closed in August 2023. Furthermore, during the second quarter, the company successfully drilled and completed 11 wells, meeting its guidance and demonstrating its operational capability.

At a stake value of $11.084 million, 11 hedge funds held positions in Ring Energy (NYSE:REI) in Q2. As of June 30, AQR Capital Management is the top shareholder in the company and has a position worth $6.04 million.