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.
8. Vivid Seats Inc. (NASDAQ:SEAT)
Revenue CAGR in the last 5 years: 306.52%
Net profit margin: 1.22%
Number of Hedge Fund Holders: 19
Vivid Seats Inc. (NASDAQ:SEAT) is an online ticket marketplace company that facilitates the buying and selling of tickets for several types of events, including sports, theater, and concerts. The business model consists of connecting fans with ticket sellers through its digital platform and offering additional advertising services and rewards programs to help further monetize its audience. SEAT’s competitive advantage is in its scale, reputation, and ability to ensure ticket authenticity and timely delivery.
In Q4 2024, Vivid Seats Inc. (NASDAQ:SEAT) delivered $200 million in revenue, representing a 1% YoY increase, while adjusted EBITDA was $33 million, down 5% YoY. For the full year 2024, the company achieved $776 million in revenues, up 9% YoY, and $151 million in adjusted EBITDA, representing a 7% increase YoY. SEAT maintained strong unit economics despite a muted market backdrop compared to the extraordinary years of 2022 and 2023.
Looking ahead to 2025, Vivid Seats Inc. (NASDAQ:SEAT) is focusing on several strategic initiatives, including international expansion with a European launch and new partnerships, such as one with United Airlines. The company’s loyalty program continues to show strong results, with enrolled members making repeat orders 2 to 3 times more frequently than non-enrolled customers and repeat orders reaching 61% of total orders. We believe the European expansion will position SEAT to continue its double-digit revenue growth momentum, which makes it one of the best quality penny stocks to consider.
7. RLX Technology Inc. (NYSE:RLX)
Revenue CAGR in the last 5 years: 52.15%
Net profit margin: 22.57%
Number of Hedge Fund Holders: 19
RLX Technology Inc. (NYSE:RLX) is a leading branded e-vapor company based in China, specializing in the design, manufacture, and distribution of electronic vapor products. The company’s advantage consists of a strong R&D base and market research that makes it possible to create e-vapor products tailored to adult smokers’ needs. The Shenzhen-based company ranked seventh on our recent list of 10 Chinese Penny Stocks to Buy According to Analysts.
RLX Technology Inc. (NYSE:RLX) achieved a strong performance in 2024, marking its seventh consecutive quarter of sequential revenue growth, with full-year revenues representing a 73% YoY increase. The company’s gross profit margin improved to 26.4% in 2024 while achieving a non-GAAP operating income of RMB 262.5 million for the full year. This financial success was primarily driven by international expansion following the termination of a significant noncompete agreement in November 2023, along with effective localized strategies for different markets.
Looking ahead, RLX Technology Inc. (NYSE:RLX) has identified that industry success will increasingly depend on refined operations, channel development, and product optimization rather than breakthrough new products. The company has strategically positioned itself by investing in team expertise, in-house product development, and regulatory compliance. Its commitment to shareholders remains strong, having returned approximately $122.9 million to shareholders in 2024 through share repurchases and dividends, with plans to continue returning substantially all non-GAAP net profit to shareholders. With a wide net profit margin of 22.57% in the latest fiscal year, RLX is one of the best quality penny stocks to consider.
6. Arko Corp. (NASDAQ:ARKO)
Revenue CAGR in the last 5 years: 20.21%
Net profit margin: 0.17%
Number of Hedge Fund Holders: 21
Arko Corp. (NASDAQ:ARKO) is among the largest operators of convenience stores and fuel wholesalers in the US. The company manages a diverse portfolio of over 25 regional store brands, including Fas Mart, E-Z Mart, and ExpressStop, and operates across four segments: retail (fuel and merchandise sales to consumers), wholesale (fuel supply to third-party dealers), fleet fueling (proprietary cardlock locations and fuel card programs), and GPM Petroleum (fuel supply to the company’s own retail and wholesale sites). The company’s large scale and stable performance across business cycles make it one of the best penny stocks to buy.
Arko Corp. (NASDAQ:ARKO) delivered results near the midpoint of their annual guidance in 2024, despite facing challenging macro conditions characterized by persistent inflation and constrained consumer spending. The company’s fourth quarter adjusted EBITDA was $56.8 million compared to $61.8 million in the prior year period, while full-year 2024 adjusted EBITDA reached $248.9 million versus $276.3 million in 2023. The company made significant progress on its dealerization program, converting more than 150 retail stores to dealer sites in 2024, with approximately 100 more stores expected to be converted by the end of Q1 2025.
Going forward, Arko Corp. (NASDAQ:ARKO) expects total company adjusted EBITDA for 2025 to be in the range of $233 million to $253 million, with the dealerization program expected to generate an annualized benefit exceeding $20 million to combined wholesale and retail segment operating income. The company is implementing strategic initiatives, including the “Fueling America’s Future” campaign, which offers customers up to $2 off per gallon for up to 20 gallons when purchasing value promotions inside stores. Additionally, ARKO has completed more than 800 tobacco back bar refreshes and saw a 200-basis point improvement in gross margin for the OTP category.
5. Talkspace, Inc. (NASDAQ:TALK)
Revenue CAGR in the last 5 years: 40.89%
Net profit margin: 0.61%
Number of Hedge Fund Holders: 24
Talkspace, Inc. (NASDAQ:TALK) is a virtual behavioral healthcare company based in the US that provides online therapy and psychiatry services through a digital platform. The company’s platform makes it easy for individuals, couples, and teens to receive therapy and medication management via text, audio, and video messaging. The TALK’s competitive advantage lies in its partnerships with major health plans and physicians to make sure that its service is accessible to more than 130 million people across most US states.
Talkspace, Inc. (NASDAQ:TALK) achieved strong financial results in 2024, with revenue growing 25% to $187.6 million and session volume increasing 45%. The company demonstrated significant profitability improvements, achieving a $20.5 million EBITDA improvement from a $13.5 million loss in 2023 to a $7 million gain in 2024 while reducing operating expenses by $7 million. The company ended 2024 with a robust balance sheet containing $118 million in cash and cash equivalents with zero debt. Looking ahead to 2025, management revenue projections represent 21% YoY growth at the midpoint, and adjusted EBITDA projections represent a 144% YoY increase at the midpoint.
Talkspace, Inc. (NASDAQ:TALK) has successfully transformed from a consumer subscription-only model to a Payor-focused approach, expanding its total covered lives to 179 million people. The company’s reach now extends beyond commercially insured adults to include teens, seniors through Medicare, and active military members and their dependents. The company maintains a curated network of 6,000 experienced licensed providers across all 50 states, focusing on over 150 different areas of expertise. With recent expansions into Medicare coverage across 48 states and TRICARE coverage for military personnel, along with various strategic partnerships, TALK has positioned itself as a comprehensive solution in the virtual mental health care space. Both short and long-term guidance offered by management is compelling, which makes TALK one of the best penny stocks to consider in 2025.
4. Melco Resorts & Entertainment Limited (NASDAQ:MLCO)
Revenue CAGR in the last 5 years: 23.24%
Net profit margin: 0.94%
Number of Hedge Fund Holders: 27
Melco Resorts & Entertainment Limited (NASDAQ:MLCO) is a Hong Kong-based developer, owner, and operator of integrated resort facilities with a focus on casino, gaming, and entertainment. The company is known for operating major properties across Europe and Asia, with the most notorious ones including City of Dreams and Studio City in Macau, City of Dreams Manila in the Philippines, and City of Dreams Mediterranean in Cyprus. A significant competitive advantage of the company is the exclusive casino license in Cyprus, which it holds for 15 years. MLCO ranked 1st on our recent list of 12 Best Hotel Stocks To Buy According to Analysts.
Melco Resorts & Entertainment Limited (NASDAQ:MLCO) demonstrated strong momentum in late 2024 and early 2025, with market share growing month-to-month in Q4 2024, reaching approximately 15.6% in December, while property visitation exceeded pre-pandemic levels for the first time since border reopening. The company had a successful Chinese New Year period, with total gross gaming revenue outpacing both 2024 and 2019 levels and property visitation up 17% compared to the previous year. January 2025 was particularly strong, being one of the best January performances in recent years, with continued momentum into February showing stronger performance than the prior year across both weekdays and weekends.
Melco Resorts & Entertainment Limited (NASDAQ:MLCO) is actively pursuing an asset-light strategy, as evidenced by the announcement to explore strategic alternatives for the City of Dreams Manila. This strategic shift aims to enhance financial flexibility, strengthen the balance sheet, and support long-term growth initiatives. On the operational front, MLCO maintains a strong liquidity position with $3.3 billion in available liquidity, including consolidated cash on hand of approximately $1.3 billion. The company is also implementing cost optimization measures, with expectations to reduce daily operating expenses from $3.2 million in Q4 2024 to approximately $3.0 million by the end of Q2 2025. With that being said, MLCO has demonstrated exceptional operational execution and is investing in its expansion. With at least 27 hedge funds owning the stock, we included MLCO in 4th place on our list of the best quality penny stocks to buy according to hedge funds.
3. MannKind Corporation (NASDAQ:MNKD)
Revenue CAGR in the last 5 years: 38.86%
Net profit margin: 9.66%
Number of Hedge Fund Holders: 29
MannKind Corporation (NASDAQ:MNKD) is a biopharmaceutical company specializing in the development and commercialization of inhaled therapeutic products for endocrine and orphan lung diseases. Its flagship product is an FDA-approved rapid-acting inhaled insulin for adults with diabetes. The company also runs a proprietary platform that enables efficient deep-lung drug delivery, which is also utilized in treatment for pulmonary arterial hypertension developed in partnership with United Therapeutics.
MannKind Corporation (NASDAQ:MNKD) achieved record revenues in Q4 2024 of $77 million, representing a 31% increase over the previous year’s quarter, while full-year revenues reached $286 million, marking a 43% increase over the prior year. The company demonstrated strong financial management by reducing debt principal by $236 million in 2024 and ending the year with a robust cash position of $203 million. The endocrine business unit posted record revenues with Q4 revenue of $23 million and full year at $82 million.
MannKind Corporation (NASDAQ:MNKD) is advancing several strategic initiatives, including the anticipated pediatric indication filing in the first half of 2025 with expected approval in early 2026, which could potentially drive Afrezza (an important product of MNKD) sales to a projected run rate of over $200 million annually. The clofazimine inhalation suspension program is progressing, with 70% of sites activated and enrollment on track for an interim readout in 2026. The “TYVASO DPI” collaboration has proven successful, contributing to making the first $1 billion product for United Therapeutics, demonstrating the strength of MNKD’s Technosphere platform, and providing non-dilutive financing for pipeline development. The depth of MNKD’s research pipeline is impressive, which makes it one of the best penny stocks to consider.
2. Shoals Technologies Group, Inc. (NASDAQ:SHLS)
Revenue CAGR in the last 5 years: 25.50%
Net profit margin: 6.04%
Number of Hedge Fund Holders: 31
Shoals Technologies Group, Inc. (NASDAQ:SHLS) is a US-based company specializing in electrical balance of systems (EBOS) solutions for solar energy projects. Its product offerings include cable assemblies, combiner boxes, junction boxes, transition enclosures, and wireless monitoring systems, designed to streamline installation and enhance system performance. The company’s primary goals include improving the efficiency of its EBOS solutions, aiming to reduce labor costs and improve reliability in solar installations, making them more appealing to the mass market. SHLS ranked 9th on our recent list of 10 Best Climate Change Stocks to Buy Now.
Shoals Technologies Group, Inc. (NASDAQ:SHLS) delivered Q4 2024 revenue of $107 million at the high end of their expected range, with strong bookings of $145 million resulting in total backlog and awarded orders of $635 million and a book-to-bill ratio of 1.4. However, the adjusted gross profit percentage was softer than expected at 37.6% due to the competitive environment and product mix, though this was partially offset by productivity improvements. For the full year 2024, revenue totaled $399 million, representing an 18.4% decline from 2023, primarily driven by widespread project delays in the industry. Despite the short-term slowdown, SHLS delivered a strong 25.50% revenue CAGR in the last 5 years, which makes it one of the best penny stocks on our list.
Looking ahead to 2025, Shoals Technologies Group, Inc. (NASDAQ:SHLS) expects revenue to be in the range of $410 million to $450 million, with adjusted EBITDA between $100 million and $115 million. The company has made significant progress in diversifying its customer base, with more than 10% of 2024 revenue coming from customers who purchased less than $1 million combined in 2023. Additionally, SHLS has expanded internationally, securing over $8 million of new projects in Q4, including Australia and Chile, and ended the year with approximately $86 million of international backlog and awarded orders. The company remains focused on protecting its core business while expanding into new markets and developing innovative products for high-growth applications.
1. Marqeta, Inc. (NASDAQ:MQ)
Revenue CAGR in the last 5 years: 38.16%
Net profit margin: 5.38%
Number of Hedge Fund Holders: 37
As a financial technology company, Marqeta, Inc. (NASDAQ:MQ) specializes in modern card issuing and payment processing solutions. Its open cloud-native platform enables businesses to create customized debit, credit, and prepaid card programs with features like Just-in-Time funding, dynamic spend controls, and tokenization for digital wallets. MQ operates globally and serves a diverse clientele across industries such as digital banking, on-demand services, expense management, and “Buy Now, Pay Later” providers.
Marqeta, Inc. (NASDAQ:MQ) demonstrated strong financial performance in Q4 2024, with Total Process Volume (TPV) reaching $80 billion, representing 29% YoY growth. The company achieved a net revenue of $136 million (14% YoY growth), a gross profit of $98 million (18% YoY growth), and an adjusted EBITDA of $13 million with a 9% margin. The company’s European business showed remarkable momentum, with Q4 TPV growth exceeding 100%, indicating successful international expansion.
Marqeta, Inc. (NASDAQ:MQ) is focusing on three key strategic pillars: deepening platform breadth, expanding solutions offered, and strengthening leadership in payments innovation. Notable developments include securing an agreement to offer American Express network options later in 2025, acquiring TransactPay to enhance European program management capabilities, and seeing significant growth in real-time decisioning risk product revenue, which more than doubled from 2023 to 2024. The company expects 2025 net revenue growth between 16% and 18%, with TPV growth in the mid-to-high 20s, and is on track to achieve GAAP profitability by the end of 2026.
Overall, MQ ranks first on our list of the 11 best quality penny stocks to buy according to hedge funds. While we acknowledge the potential of MQ to grow, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. There is an AI stock that went up since the beginning of 2025, while popular AI stocks lost around 25%. If you are looking for an AI stock that is more promising than MQ but that trades at less than 5 times its earnings, check out our report about this cheapest AI stock.
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