In this article, we will take a detailed look at the best quality penny stocks to buy according to hedge funds.

The quality factor in stocks refers to companies with strong fundamentals, financial stability, and reliable performance, with an aim for resilience rather than speculative growth. Quality stocks can be proxied through several metrics – as Hsu, Kalesnik, and Kose put it in their 2019 paper:

“Quality as an investment factor is systematically associated with persistent profitability, low leverage, and stable earnings growth.”

Besides that, these stocks often exhibit high revenue growth, good management practices, and a sustainable competitive advantage reflected through double-digit return on invested capital. The attractiveness of quality stocks consists in their lower volatility, defense capabilities, and ability to outperform the broad market during recessions or periods of pronounced uncertainty.

In the context of penny stocks, the quality factor becomes elusive, as most penny stocks inherently lack stable fundamentals, carry higher volatility, and often possess weaker balance sheets. Nevertheless, it is still positive to find quality penny stocks, which results in a powerful blend of high growth and high return features with resilience and consistency of growth. The best quality penny stocks are likely to deliver robust high growth even during market downturns and outperform the benchmark by a wide margin. The positive effect of the quality factor on stock returns has been proven by leading researchers, such as the Asness, Frazzini, and Pedersen (2019) paper. Here’s an excerpt from the paper:

“High-quality stocks have higher risk-adjusted returns than low-quality stocks… A quality-minus-junk (QMJ) factor earns significant risk-adjusted returns in U.S. and global stocks.”

READ ALSO: 11 Best Fundamentally Strong Penny Stocks to Buy Now.

The primary takeaway for readers is that incorporating quality penny stocks in a portfolio can boost the overall return of the portfolio per unit of risk, which has always been the ultimate goal of many successful investors. However, the quality factor tends to perform better in specific market periods, and we believe the US stock market has entered such a period for the following reasons. First, smart money tends to flock into quality stocks with stable profitability, cash flows, and strong revenue growth in periods of uncertainty. The US stock market is currently shaken by the Trump tariffs. The uncertainty persists as of April 1,  as evidenced by the VIX volatility index being at a value of 31, more than 50% above the daily 200 moving average.

Second, there are reasons to expect a significant deceleration in GDP and earnings growth in the first half of 2025, as the cuts in public spending as well as the tariffs uncertainty are a huge headwind for private spending and Capex – CEOs tend to be reluctant to invest heavily into the business when they lack visibility for the near-term. Consequently, the odds are that Q1 2025 earnings, once reported, will show a sequential slowdown in growth. FactSet Insight showed that the Q2 2025 earnings growth for the US stock market is expected at +7.2% YoY, significantly below the +18.2% actual for the previous 4Q 2024. Keep in mind that there’s still potential for actual growth to come even lower than the +7.2% estimate.

Last but not least, the S&P index remains below its daily 200 moving average, an area where nothing good tends to happen. The last time the market broke below the 200 moving average was in January 2022, which resulted in a 12-month-long bear market with an absolute drawdown of -28%, much above the current -13%. This means that the current market correction may not be over yet; if the broad market stays in red territory, it is inevitable that money will start flowing increasingly toward high-quality stocks and penny stocks, boosting their valuations. All in all, the aforementioned findings support the thesis that the quality factor will be favored over the following months, which means we might be at an opportune time to buy the best quality penny stocks.

Our Methodology

We used a stock screener to identify companies with a share price under $5.00 that have at least 20% revenue CAGR in the last 5 years and a positive net profit margin. Then we compared the list with our proprietary database of hedge funds’ ownership and included in the article the top 11 stocks with the largest number of hedge funds that own the stock as of Q4 2024. The stocks are ranked in ascending order.

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 373.4% since May 2014, beating its benchmark by 218 percentage points (see more details here).

11. FIGS, Inc. (NYSE:FIGS)

Revenue CAGR in the last 5 years: 45.57%

Net profit margin: 0.41%

Number of Hedge Fund Holders: 14

​FIGS, Inc. (NYSE:FIGS) offers medical uniforms and products for healthcare professionals. The company’s product portfolio includes scrubs, lab coats, outerwear, and activewear. FIGS’ competitiveness is ensured through such features as antimicrobial properties, four-way stretch, and multiple pockets to enhance comfort and functionality. It has also established a significant presence in the US market and is expanding internationally.

FIGS, Inc. (NYSE:FIGS) delivered Q4 2024 revenue growth of 5% YoY, outpacing their implied range for the quarter, with revenues reaching $151.8 million. The company saw positive signs in repeat frequency and non-promotional sales, while international business grew 45% to represent 16% of net revenues. Despite these positives, the company acknowledged challenges throughout 2024, including average orders pressure, more challenging customer acquisition, and various pressures impacting healthcare professionals.

Looking ahead to 2025, FIGS, Inc. (NYSE:FIGS) is implementing significant strategic changes, including a reduction in promotional activity to strengthen long-term brand health, though this is expected to negatively impact top-line performance. The company is focusing on expanding globally, particularly in Asia, with planned openings in Japan and South Korea, while also advancing its fabric innovation with the launch of FORMx. Additionally, management plans to invest in channel expansion through the team’s business and retail presence, supported by a strong financial position with $245.1 million in cash and no debt. With a strong business and a long runway for growth ahead, FIGS is one of the best penny stocks to consider.

10. Hafnia Limited (NYSE:HAFN)

Revenue CAGR in the last 5 years: 36.39%

Net profit margin: 26.98%

Number of Hedge Fund Holders: 15

​​​Hafnia Limited (NYSE:HAFN) is a global operator of tankers engaged in the transportation of oil and related products and chemicals. With a fleet of over 200 vessels across various segments, the company offers integrated shipping services, technical management, commercial and chartering operations, pool management, and bunker procurement. HAFN serves a diverse clientele of national and international oil companies, chemical firms, and utility providers.

Hafnia Limited (NYSE:HAFN) delivered strong financial results in 2024, achieving a net profit of $774 million for the full year, with Q4 contributing $79.6 million to this total. The company generated a robust TCE income of $1.4 billion for the year, supplemented by $35.2 million in revenue from adjacent fee-generating businesses. The company maintained a strong financial position with a cash balance of $195 million and total liquidity of approximately $517 million at year-end.

Hafnia Limited (NYSE:HAFN)’s fleet maintains a competitive advantage with an average age of 9.1 years, significantly younger than the global product tanker fleet average of approximately 14 years. Looking ahead to 2025, despite market uncertainties, management projects robust net profits estimated to range around $300 million to $400 million, supported by strong market fundamentals and strategic positioning. With explosive 36.39% historical revenue CAGR and 15 hedge funds owning the stock, HAFN is one of the best penny stocks to buy.

9. DocGo Inc. (NASDAQ:DCGO)

Revenue CAGR in the last 5 years: 79.36%

Net profit margin: 3.24%

Number of Hedge Fund Holders: 17

​​​DocGo Inc. (NASDAQ:DCGO) is a provider of mobile health and medical transportation services across 31 US states and the UK. Through its extensive network of mobile units, the company offers urgent care, chronic disease management, and remote patient monitoring services directly at patients’ locations. For its services, DCGO is paid by hospitals, health systems, government agencies, and corporate partners, with money that accumulates from health insurance. DCGO also ranked sixth on our recent list of 11 Best Fundamentally Strong Penny Stocks to Buy Now.

DocGo Inc. (NASDAQ:DCGO) reported Q4 2024 revenues of $120.8 million, representing a 39% decrease YoY, with the decline primarily attributed to winding down migrant-related projects. While the company maintained gross margins relative to the last year, SG&A as a percentage of revenues increased substantially in Q4, reflecting continued investments in infrastructure for future growth opportunities. The company generated $70.3 million in cash flow from operations in 2024, a significant improvement from negative $64.2 million in 2023.

DocGo Inc. (NASDAQ:DCGO) is actively transitioning from crisis response work to more sustainable, evergreen revenue streams, particularly in care gap closure programs where they achieved a world-class NPS score of 86. The company’s pipeline includes 27 municipal contracts, 29 health system deals, and over 120 payer and provider opportunities, with several existing health plan partners looking to significantly expand their relationship in scope and scale. For 2025, management anticipates significantly higher cash flow from operations compared to the $70 million generated in 2024. The strong guidance for 2025 suggests that the immigration-related headwinds are in the rear-view mirror, which makes us include DCGO on our list of best penny stocks to buy.