In this article, we will take a look at the 10 best rising penny stocks to buy. To see more such companies, go directly to 5 Best Rising Penny Stocks to Buy.
Amid too much volatility everyone seems to avoid small companies that are working on disruptive products or services which are yet to show their true effects or results. However, long-term and wise investors know that endless opportunities could be found in the small- and micro-cap universe. According to a report from HighVista Systematic Strategies, from 2003 to 2020, on average, micro-cap stocks have outperformed Russell 2000 Index by 1.75% per year (arithmetic average return). An active micro-cap strategy outperformed in 66% of all trailing 12-month periods and 84% of all trailing 3-year periods over the past 17 years. The report highlights a very important trend here. It says that the micro-cap space has been seeing less and less involvement and participation from large institutional funds. That’s because these funds prefer to allocate most of their resources to large companies in a market that is quickly becoming a “winner take all” industry.
A report from Oberweis Asset Management paints a similar picture where investors are gravitating towards mid- or large-cap stocks. The report shares that in 2012, an average small-cap manager allocated nearly 53% of their portfolio to companies with market caps under $1.5 billion. That figure fell to 24% in 2022. Of course, increasing volatility, rising inflation, the start of a bear market, rising interest rates and geopolitical tensions had a role to play here, but the overall market shift away from micro-cap companies is clearly visible over the past several years. The Oberweis report then goes on to compare small-cap stocks and micro-cap stocks to prove that micro-cap stocks have performed better than small-cap stocks. The report said that micro-cap managers generate more returns than small-cap managers, “with top-quartile, median, and even bottom-quartile micro-cap managers outperforming their small-cap peers over multiple historical time frames.”
Are Micro-Cap Stocks More Risky than Small-Cap Stocks?
The report debunks another myth that has played a key role in the overall market shift away from micro-cap stocks. It says that the element of risk is not significantly higher in the micro-cap world when compared to small-cap stocks. In fact, the report says that risk-adjusted rolling 3-year returns measured by Sharpe Ratio are “nearly identical” for small- and micro-cap stocks. Another key reason that makes micro-cap stocks attractive especially in the current backdrop is their peculiar nature when it comes to their correlation with foreign stocks, overall market conditions and bonds. Here’s what the report said:
“Allocating a small percentage of an investor’s total equity portfolio to U.S. micro-cap equities can increase a total portfolio’s risk-adjusted return. Why? Because micro-cap stocks aren’t highly correlated with other asset classes, including other U.S. equities, bonds and foreign stocks. In other words, micro-cap stocks behave differently than other asset classes and allocating a small percentage of a portfolio to these dissimilar equities increases diversification and should increase risk-adjusted returns.”
Nearly every investment firm or notable Wall Street analyst has large-cap, well-known firms on their radars. All their research reports and estimates are focused on the companies that make headlines or remain in the news. But what about micro-cap companies? The Oberweis report says that on average, there are five times as many analysts covering large-cap companies compared to average micro-cap companies. The report also says that nearly one-third of micro-caps are covered by only one sell-side analyst, and some aren’t covered at all. This means opportunity for investors and active managers who are ready to conduct a lot of research to find micro-cap stocks of today that have the potential to grow big in the future.
Another report from Perritt Capital entitled “top 10 reasons to invest in micro-caps” mentions some interesting, data-based reasons on why investors should pay attention to micro-cap stocks. One of the reasons the report lists says that micro-cap stocks provide higher highs and “higher lows”. This reason is based on data showing 20-year rolling return periods which shows that micro-cap stocks beat small-cap and large-cap stocks in terms of returns for a period starting from 1925 to 2018. The Perritt report also shares an interesting data point that proves that the micro-cap space lacks analyst coverage, as mentioned above. The report said that as of 2018, 18.8% of micro-cap stocks had no analyst coverage, compared to just 7.8% for small caps and 0.9% for mid caps. Lack of analyst coverage means fewer eyes on these stocks and if an investor or a fund is resilient enough to separate wheat from the chaff and do research, they stand a chance to find disruptive companies.
Photo by Mohamed Hadji on Unsplash
Our Methodology
For this article, we first used stock screener to identify penny stocks that have gained at least 50% in value year to date through July 8. From the large list of stocks we got as a result we picked 10 stocks with the highest number of hedge fund investors. The 10 stocks mentioned in the article, hence, are the best rising penny stocks to buy according to hedge funds.
Best Rising Penny Stocks to Buy
10. Ocular Therapeutix Inc. (NASDAQ:OCUL)
Number of Hedge Fund Holders: 17
Ocular Therapeutix Inc. (NASDAQ:OCUL) makes treatments for eye diseases using its bioresorbable hydrogel-based formulation technology. Ocular Therapeutix Inc. (NASDAQ:OCUL) has gained 75% year to date through July 8. However, Ocular Therapeutix Inc. (NASDAQ:OCUL) fell about 9% on June 12 after the company announced 12-month data from its Phase 1 clinical trial for eye implant OTX-TKI in patients with wet age-related macular degeneration.
A total of 17 hedge funds tracked by Insider Monkey were long Ocular Therapeutix Inc. (NASDAQ:OCUL) as of the end of the first quarter. The biggest stakeholder of Ocular Therapeutix Inc. (NASDAQ:OCUL) was James A. Silverman’s Opaleye Management with a $32 million stake in the company.
9. MultiPlan Corporation (NYSE:MPLN)
Number of Hedge Fund Holders: 18
MultiPlan Corporation (NYSE:MPLN) sells data analytics and technology-enabled cost management, payment, and revenue integrity solutions to the healthcare industry.
MultiPlan Corporation (NYSE:MPLN) shares have gained about 88% year to date through July 8. MultiPlan Corporation (NYSE:MPLN) jumped in May after the company said it will acquire healthcare data analytics company Benefits Science in a $160 million cash and stock transaction, plus other potential payments.
As of the end of the first quarter of 2023, 18 hedge funds had stakes in MultiPlan Corporation (NYSE:MPLN). The total worth of these stakes was $80 million.
8. Archer Aviation Inc. (NYSE:ACHR)
Number of Hedge Fund Holders: 18
eVTOL company Archer Aviation Inc. (NYSE:ACHR) is in the limelight along with other air taxi services companies on the back of several positive developments in the industry that point to a bright future of air taxi service companies. Joby Aviation (NYSE:JOBY) recently received regulatory approval in the U.S. to expand testing of its air taxi service.
It was also reported that Archer Aviation Inc. (NYSE:ACHR) was mulling an expansion strategy in Middle East and Asia.
Canaccord Genuity recently said that air taxi service could become a ridesharing-like industry and challenge companies like Uber and Lyft.
“eVTOL aircraft, given their optimized ranges in the 20- to 50-mile range for journeys, are in a strong position to take share in the ground vehicle-based ridesharing sector. Based on our estimates, ~15% of rides hailed to and from airports and 5% of longer-distance regional trips could be replaced by eVTOL aircraft, potentially reaching 45M monthly active riders within the next decade,” Canaccord said.
A total of 18 hedge funds in Insider Monkey’s database had stakes in Archer Aviation Inc. (NYSE:ACHR) as of the end of the first quarter.
7. The RealReal, Inc. (NASDAQ:REAL)
Number of Hedge Fund Holders: 19
California-based The RealReal, Inc. (NASDAQ:REAL) operates an online marketplace for luxury goods. The RealReal, Inc. (NASDAQ:REAL) jumped earlier this year after Michael Burry’s hedge fund Scion Asset Management reported owning 684,442 shares of the company. The RealReal, Inc. (NASDAQ:REAL) has gained about 98% in 2023 through July 9. In addition to Burry, 18 hedge funds in Insider Monkey’s database have stakes in The RealReal, Inc. (NASDAQ:REAL). DE SHAW is the biggest stakeholder of The RealReal, Inc. (NASDAQ:REAL) with a $2.5 million stake.
In May The RealReal, Inc. (NASDAQ:REAL) posted Q1 results. Adjusted EPS in the quarter came in at -$0.36 beating estimates by $0.07. Revenue in the period fell about 3.3% year over year to $141.9 million, missing estimates by $0.51 million.
In the first quarter The RealReal, Inc. (NASDAQ:REAL)’s Gross Merchandise Value jumped 4% year over year. For the full year The RealReal, Inc. (NASDAQ:REAL) expects its revenue to come in at $627.57 million.
6. Accuray Incorporated (NASDAQ:ARAY)
Number of Hedge Fund Holders: 20
Radiosurgery and radiation therapy systems company Accuray Incorporated (NASDAQ:ARAY)’s shares have gained over 75% year to date. Last month Accuray Incorporated (NASDAQ:ARAY) announced that it will be included in the Russell 2000 index and the broad-market Russell 3000 index.
A total of 20 hedge funds in Insider Monkey’s database of 943 funds reported having stakes in Accuray Incorporated (NASDAQ:ARAY) as of the end of the March quarter. The biggest stakeholder of Accuray Incorporated (NASDAQ:ARAY) was Constantinos J. Christofilis’s Archon Capital Management which owns an $18 million stake in the company.
In April Accuray Incorporated (NASDAQ:ARAY) posted its fiscal third quarter results. GAAP EPS in the quarter came in at $0.01, beating estimates by $0.02. Revenue in the quarter jumped 22.8% year over year to $118.1 million, beating estimates by $8.32 million.
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Disclosure: None. 10 Best Rising Penny Stocks to Buy is originally published on Insider Monkey.
