In this article we take a look at some of the hot penny stocks that are gaining value. To see more such stocks click 5 Hot Penny Stocks To Buy.
Investing in small-cap and micro-cap companies comes with a lot of volatility, surprises and risks. When broader markets are in turmoil, like they are ever since the inflation crisis started to hammer the global markets and the Federal Reserve started to raise rates, investing in small companies and penny stocks becomes even more risky as investors flock to stable, large-cap plays. But when markets begin to rebound small companies tend to perform better. For example, after the latest jobs report showed that the US labor market remains hot, the Russell 2000 index of small-cap stocks jumped 3.2%, surpassing the S&P 500 gains of 1.5%. This is because when indicators point to robustness of the US economy, investors flock to small-cap stocks which are often focused on the domestic US market.
Small-cap stocks have been showing an upbeat trend since earlier this year when markets rebounded on hopes that the Federal Reserve will start hitting brakes on its interest rate hikes. According to a report from the WSJ, data from Refinitiv Lipper showed that investors poured a whopping $4.2 billion in U.S. mutual and exchange-traded funds that buy small-cap stocks in 2023 through February 22. Data also showed that investors pulled $17.4 billion from large-cap funds in the same period. Small-cap stocks were the second most-attractive investment option of investors this year after international stocks, which attracted $16 billion in the same period.
Compare this outperformance to the bloodbath seen in small-cap stocks last year and you start to understand the investor appetite for risky stocks amid resilient economic growth. Small-cap stocks significantly underperformed the S&P 500 in 2022 as funds investing in small-cap plays saw outflows of a whopping $28.5 billion, according the WSJ. The Journal quoted Rayna Lesser Hannaway, a portfolio manager at Polen Capital, who said that the market has been anticipating a recession for quite some time now and she “hopes” that companies’ management teams are taking smart decisions today to weather economic storms of tomorrow.
Hannaway co-manages the The Polen US Small Company Growth fund, which is up about 10% year to date as of June 3.
Another reason why investors are preferring small-cap stocks is their attractive valuations. The WSJ report quoted Jim Masturzo, chief investment officer of multiasset strategies at Research Affiliates, who said that his firm is expecting the Russell 2000 index to return about 5% a year over the next 10 years. This would be more than double the 1.9% return he expects to see from the S&P 500.
While small-cap stocks are gaining attention this year, when it comes to penny stocks, the rules of the game change since penny stock investing comes with a lot of risks and a peculiar stigma attached to invest.
Does Investing in Penny Stocks Make Sense?
An interesting study titled The Cross-section of Expected Returns on Penny Stocks –
Are Low-hanging Fruits Not-so Sweet? which analyzes the Indian penny stock space mentions the allure of penny stocks and the risks attached in the following words:
“Another important attribute of penny stocks is that they carry huge potential for profits for those investors who are high risk-seekers as these stocks carry high risk mainly because of information asymmetry, low liquidity, and uncertainty related to the fundamentals of such companies. The asymmetric information leads to under- valuation of penny stocks. This essentially enables aggressive investors to find the right kind of penny stocks and presents huge profit potential. While the penny stocks are highly risky and carry high potential for returns, they are cheaply available hence can be invested in easily by even small retail investors who might not have deep pockets. It is, therefore, penny stocks seem a tempting investment choice for small retail investors. However, due to high risk attribute, if wrongly traded, penny stocks might prove detrimental for small retail investors.”
While penny stocks seem risky, it’s important to note that many successful companies today were once trading as penny stocks. The market is always offering opportunities and there are always companies that trade for price tags under $5 or $10. For example, some stable companies that are trading under $10 today include BlackBerry Ltd (NYSE:BB), Plug Power Inc (NASDAQ:PLUG) and Sirius XM Holdings Inc (NASDAQ:SIRI).
Ford Motor Co (NYSE:F), one of the biggest car companies in the world, was trading at around $2 back in 1983. Back in 2008, Apple’s stock price was around $3.2. Today the company’s market cap stands at $2.8 trillion.
Wisdom from Billionaire Howard Marks
In 2011, billionaire Howard Marks, in a memo to his clients, talked about his meeting with Charlie Munger where they discussed Marks’ book The Most Important Thing. Marks in the memo talks about some key themes which show the importance of setting your expectations right before investing. Marks recalled how Charlie Munger said during the meeting that anyone who thinks the investing world is easy was wrong.
“It’s not supposed to be easy. Anyone who finds it easy is stupid.”
Marks then goes on to elaborate what it takes to win in the stock investing world and how to make contrarian bets that actually pay off. For that he uses two levels of thinking: first-level thinking and second-level thinking. Here’s how Marks explains these systems:
For example, when I lived in Los Angeles, a stockbroker often spoke on the radio station I listened to while driving to work. His advice was simple: “If there’s a company whose product you like, buy the stock.” That’s first-level thinking. How seductively easy. But also how error-prone, in that it ignores the possibility that a company with a good product can have a bad business; the good product can become obsolete; or the stock can be priced too high to be a good investment. On the other hand, second-level thinkers double-think (and triple-think) every angle of every situation. A good example can be seen in the hypothetical newspaper contest John Maynard Keynes wrote about in 1936. Readers would be shown 100 photos and asked to choose the six prettiest girls, with prizes going to the readers who chose the girls readers voted for most often. Naive entrants would try to win by picking the prettiest girls. But note that the contest would reward the readers who chose not the prettiest girls, but the most popular. Thus the road to winning would lie not in figuring out which were the prettiest, but in predicting which girls the average entrant would consider prettiest. Clearly, to do so, the winner would have to be a second-level thinker. (The first-level thinker wouldn’t even recognize the difference.)
Methodology
For this article we scanned Insider Monkey’s database of 943 hedge funds and picked 10 penny stocks (stocks priced under $5) that have posted strong gains in the past thirty days through June 1 and have the highest number of hedge fund investors.
10. Alto Ingredients (NASDAQ:ALTO)
Number of Hedge Fund Investors: 13
Illinois-based Alto Ingredients makes specialty alcohol and essential ingredients. The Alto Ingredients stock (NASDAQ:ALTO) has gained about 62% over the past one month through June 1. The company recently posted its Q1 results. While GAAP EPS in the period totaled -$0.18 and missed estimates by $0.05, revenue jumped 1.9% on a YoY basis to reach $313.89 million, beating estimates by $16.28 million.
9. Rigetti Computing Inc (NASDAQ:RGTI)
Number of Hedge Fund Investors: 13
Rigetti Computing Inc (NASDAQ:RGTI) makes quantum ICs used in quantum computers. Over the past one month, Rigetti Computing stock (NASDAQ:RGTI) has gained a whopping 154% in value. The company recently posted its first-quarter results. GAAP EPS in the quarter came in at -$0.19, beating estimates by $0.02. Revenue in the quarter jumped about 4.8% year over year to $2.2 million, surpassing estimates by $1.88 million.
RGTI, like BlackBerry Ltd (NYSE:BB), Plug Power Inc (NASDAQ:PLUG) and Sirius XM Holdings Inc (NASDAQ:SIRI), is a popular under-$10 stock that hedge funds like.
8. Leap Therapeutics Inc (NASDAQ:LPTX)
Number of Hedge Fund Investors: 14
Leap Therapeutics Inc (NASDAQ:LPTX) is focused on the development of cancer treatments. The Leap Therapeutics stock (NASDAQ:LPTX) has gained about 71% over the past one month. Julian Baker and Felix Baker’s Baker Bros. Advisors was one of the 14 hedge funds that reported owning stakes in the company as of the end of the March quarter. The fund owns a $2.5 million stake in the company. GAAP EPS of the company in the first quarter came in at -$0.32, missing estimates by $0.23.
7. Autolus (NASDAQ:AUTL)
Number of Hedge Fund Investors: 15
Clinical stage biopharmaceutical company Autolus (NASDAQ:AUTL) is working on treatments for several diseases, including Acute Lymphoblastic Leukemia. Autolus stock (NASDAQ:AUTL) is up 52% over the past one month. In the first quarter, the company’s GAAP EPS came in at -$0.23, beating estimates by $0.04. Cash and cash equivalents and restricted cash as of the end of March totaled $343.4 million, compared to cash of $382.8 million at December 31, 2022. Of the 943 hedge funds tracked by Insider Monkey, 15 funds had stakes in the company as of the end of the first quarter.
6. Compass Inc. (NYSE:COMP)
Number of Hedge Fund Investors: 16
Internet-based real estate brokerage company Compass Inc. ranks sixth in our list of the hot penny stocks to buy. Compass stock (NYSE:COMP) has gained about 43% over the past one month. Earlier in May, the company posted its Q1 results. GAAP EPS in the quarter came in at -$0.33, beating estimates by $0.02. Revenue in the period fell about 31.5% year over year to $957.2 million, still beating estimates by $49.79 million. For the second quarter, the company expects its revenue to come in the range of $1.45 billion to $1.6 billion, while the consensus estimate for this figure was $1.50 billion. Richard Mashaal’s Rima Senvest Management was the most significant shareholder of the company as of the end of the first quarter, with a $43 million stake. In addition to BlackBerry Ltd (NYSE:BB), Plug Power Inc (NASDAQ:PLUG) and Sirius XM Holdings Inc (NASDAQ:SIRI), COMP is a notable stock trading under $10 that is popular among hedge funds.
Click to continue reading and see 5 Hot Penny Stocks To Buy.
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Disclosure: None. 10 Hot Penny Stocks To Buy is originally published on Insider Monkey.
