In this article, we will look at the 7 Cheapest Penny Stocks to Buy Now.

What Does the Jobs Report Mean for the Stock Market

The Federal Reserve rate cut continues to be a hot topic for analysts especially with the new development that came in on October 4th with the Bureau of Labor Statistics releasing the job market report. One of the reasons why the Fed cut rates by 50 basis points was attributed to a weak labor market. It seems that the rate cut has worked but it also means that there might not be any urgency for the Fed to cut rates by another 50 basis points.

On October 4th Reuters reported the job market displayed significant resilience in September, with a notable increase of 254,000 non-farm payrolls and a drop in the unemployment rate to 4.1%. The United States Job gains increased the most in September when compared to the past six months. Moreover, on top of a higher than expected increase in non-farm jobs, wages also increased at a solid pace last month.

Fed Chairman Jerome Powell had already pointed out that the urgency to cut interest rates is not what the market demands at the moment. He mentioned that the committee does not feel the hurry to cut rates quickly.

These recent developments have paved the way for smooth 25 basis point cuts and also brightened the path for a soft landing scenario. In one of our recent articles on 8 Stocks Under $20 To Invest In Now, we discussed the soft landing scenario in detail and what it will mean for the stock market. Here’s an excerpt from the article:

“Larry Adam, chief investment officer at Raymond James, says that the current market is exactly what a soft landing looks like. Adam recently appeared in an interview on CNBC to talk about how the lower interest rates will benefit the small caps in particular the Russell 2000. He believes that the bull market will continue while the economy inches towards a soft landing.

When it comes to small-cap stocks they get around 56% of their financing from the short end of the curve. The short end of the curve refers to the short-term interest rate on the yield curve, which typically represents the yields on bonds with shorter maturities, such as 2-year or 5-year Treasury notes. Whereas the large-cap companies get only 26% financing from these short ends of the curve. Therefore, Adam believes that as the Fed continues to lower interest rates it will help small caps meet financing needs.

He further pointed out that it is expected that the Fed will cut twice this year and another four times the next year. Another reason why he likes small caps is because the economy is going towards a soft landing. Adam emphasized that we have already seen that the rate cuts helped small caps outperform the large caps. Historically speaking whenever the economy has a soft landing it typically helps the small caps greater than the rest of the market.”

To talk about how the market will look like after this report, Jeremy Siegel, Wharton School professor of finance joined CNBC. He pointed out an interesting fact from the jobs report. Siegel mentioned that although 550,000 new jobs were added in the third quarter, hours worked were virtually flat.

Siegel expects third-quarter GDP to be around 2.5% to 3%. Moreover, the good news for the stocks is that the current job market figures are not inflationary but rather pointing toward productivity. Professor Siegel emphasized that he never thought the second cut would be 50 basis points and vouched for a series of 25 basis points cuts each quarter. This all points towards the soft landing scenario becoming more likely.

Is There More Room for Small Caps to Rally?

Now that we know that the economy is moving towards a soft landing rather than a recession, let’s see how the small caps are expected to perform under current circumstances. To talk about the expected performance of small caps in a slowing economy, Nancy Prial, Co-CEO & Senior Portfolio Manager at Essex Investment Management recently joined CNBC for an inverview.  Prial thinks that this is the beginning of a multi-year bull cycle for small cap stocks. There are few basic underlying factors behind this claim including small caps being significantly under owned, in fact they are at record lows as a percentage of the total equity market. Moreover, the valuations of small caps are incredibly attractive and well below their large cap counterparts in the S&P 500.

Prial thinks what we really needed to turn the situation around was the Federal Reserve interest rate cuts and the confidence that the economy is moving towards a soft landing. Another significant factor that was needed is the relative earnings growth for small cap stocks. Prial quoted that the earnings growth for these stocks are expanding and expects that by the end of the year small caps will be growing faster than the large caps.

If we look at the S&P 500 EPS growth rate estimates, the market is expected to grow more than 13% year-over-year during the fourth quarter and more than 15% next year. As Nancy Prial mentioned that small caps are expected to outperform the large caps in growth, she further clarified that the overall indices might not be able to perform above 15%. However, to capitalize on the earnings growth trend, investors have to be good stock pickers as she believes there are going to be a lot of small cap stocks that will post more than 15% to 20% growth next year. Within the small cap category, Prial likes the energy sector as she thinks it will be a main player in the data center and AI industry for the years to come.

With that, let’s look at the 7 cheapest penny stocks to buy now.

Our Methodology

To compile the list of 7 cheapest penny stocks to buy now we used the Finviz stock screener. Using the screener we got a consolidated list of stocks trading under $5, with a forward price-to-earnings ratio under 24.35 (the market’s P/E ratio as per Wall Street Journal), and with earnings expected to grow this year. Once we had an aggregated list of stocks that fit our criteria we then ranked them based on the number of hedge fund holders in Q2 2024, sourced from Insider Monkey’s database. The list is ranked in ascending order of the number of hedge funds. Please note that the share prices mentioned in the article were recorded on October 7, 2024.

Why do we care about what hedge funds do? 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).

7 Cheapest Penny Stocks to Buy Now

7. Definitive Healthcare Corp. (NASDAQ:DH)

Share Price: $4.34

Forward P/E Ratio: 13.33

Earnings Growth This Year: 6.70%    

Number of Hedge Fund Holders: 15 

Definitive Healthcare Corp. (NASDAQ:DH) is a healthcare company, specializing in healthcare commercial intelligence. In simple terms, it collects and analyzes data for healthcare providers to help them make better business decisions. Their software platform allows healthcare businesses to shape raw data into insightful information using artificial intelligence and machine learning algorithms.

The company recently announced the expansion of its Population Intelligence platform for a broader set of industries within the healthcare segment. The platform will now be able to support advertising, marketing, telehealth, and staffing industries. It uses data from more than 250 million unique consumers aged above 18 years spanning over 300 clinical propensity.

While it is true that Definitive Healthcare Corp. (NASDAQ:DH) has been facing challenges in getting significant new customer acquisitions, the important point to note here is that this is an industry-wide issue faced by all health technology companies. Moreover, if we look at the second quarter earnings call results, we see that its Enterprise customers have grown substantially during the year. The Enterprise customers grew 32% year-over-year.

Moreover, the company’s balance sheet looks good. The top line grew 5% year-over-year to reach $63.7 million. At the same time, the adjusted gross profits were up 1% to $53.1 million. Definitive Healthcare Corp. (NASDAQ:DH) also enjoys significant revenue from its subscription base which improved 5% during the same time.

Lastly, management’s ability to generate cash flow from operations during tough times is also lucrative. The company was able to generate $14 million in cash flow, representing a 17% increase year-over-year.

Conestoga Capital Advisors stated the following regarding Definitive Healthcare Corp. (NASDAQ:DH) in its Q2 2024 investor letter:

“Definitive Healthcare Corp. (NASDAQ:DH): Based in Framingham, MA, DH is a leading provider of healthcare commercial intelligence software. While the end market has been extremely challenging for all participants over the past two years, DH has also executed poorly. In the most recent quarter, strategic changes to the sales force caused significant disruption to new customer acquisition and led to a full-year guidance downgrade just ten weeks after initiating guidance. Combined with instability at the management level, this deterioration in fundamentals constitutes a thesis change.”

6. OppFi Inc. (NYSE:OPFI)

Share Price: $4.47

Forward P/E Ratio: 6.01

Earnings Growth This Year: 45.10%    

Number of Hedge Fund Holders: 15

OppFi Inc. (NYSE:OPFI) is a financial technology company that enables Americans to access credit from commercial banks. It allows people to access loans and credit products through its platform, who otherwise are not eligible for traditional loans. The company offers three main programs including OppLoans, where eligible applicants can apply for loans online through a mobile-friendly platform, the TurnUp Program helps users compare various credit products in the market, lastly, the SalaryTrap which allows borrowers to repay directly from their paychecks.

When it comes to the investment case for OppFi Inc. (NYSE:OPFI) two things stand out. First is its history of profitability, the company has been generating positive net income for the past 9 years. Second, the point of attraction is its addressable market which accounts for more than 60 million Americans with no bank accounts or access to traditional banking services.

Talking about profitability, OppFi Inc. (NYSE:OPFI) posted a record second quarter during the current year. Its net income increased 53.1% year-over-year to reach $27.7 million, indicating the record second-quarter income the company has ever generated. Its adjusted earnings per share also increased 53.3% during the same time. Both net income and EPS bested management’s expectations, resulting in a raised full-year guidance by more than 20%.

OppFi Inc. (NYSE:OPFI) is trading at a discounted valuation. It is trading at only 6 times its forward earnings with analysts expecting its earnings to grow by 45% during the year, thereby making OPFI one of the cheapest penny stocks to buy now.