New and inexperienced investors are usually advised to stick to index funds, or ETFs at the beginning, and if they want to venture into individual stocks they should look at value rather than growth investing (see here why). However, there is one group of stocks that looks particularly interesting to beginners: penny stocks. Penny stocks is the common name for companies whose shares is trading at below $1 and that’s why they look very enticing. Penny stocks allow investors to hold large amounts of shares at a low initial investment and there is a small chance to reap very high returns, when a gain of just a few cents per share can translate into huge percentage returns.
However, penny stocks are extremely risky and are usually considered speculative investments. Moreover, the bulk of penny stocks is trading on over-the-counter market where companies are less regulated and are not required to register with the Securities and Exchange Commission. Less regulation and lack of disclosure means that companies don’t always have to be truthful about their performance and the market is often used by scammers. Given that a gain of just a few cents translates into big percentage gains, the opposite is also true, so it’s very easy to lose all or almost all invested capital very quickly. Nevertheless, there are also many stocks that are trading below $1 per share on major exchanges.
So, if you understand the risk and have the courage and patience to invest in penny stocks, you have to pick the right approach. Generally, penny stocks that are trading over-the-counter are best for day trading or swing trading (when a position is held for several days). Investing in over-the-counter penny stocks for the long run requires a lot of research and a lot of luck, because you will be taking your chances with the company and hoping that the information it discloses is accurate. Therefore, for long-term investing, it’s better to stick with penny stocks that are trading on major exchanges.
Pixabay/Public Domain
But even on major exchanges, there are many stocks to chose from and there are still many risks involved. So, the next logical step is to identify why the stock price has slid below the $1 threshold and whether the company has a chance to rebound. And here’s where our research may come in handy. Before looking at each company’s results, you might want to take a look at the penny stocks that smart money invest in. Hedge funds and other institutional investors are very large and usually invest in big companies. However, there are also many penny stocks that these investors hold, although given their size, they can afford the risks. Nevertheless, they thoroughly research each company they invest in, so if they chose to own a penny stocks, it’s worth taking a look at them.
At Insider Monkey, we follow over 650 hedge funds and compile data from their quarterly 13F filings to get an idea about their collective sentiment towards thousands of stocks. We use the data to identify the best stocks to outperform the market using our proprietary methodology that takes into account small-cap stocks that the best-performing hedge funds are collectively bullish on (see more details here). At the same time, we can look at other groups of stocks and, in this case, we have selected five stocks that are trading under $1 that have the most investors from our database holding their shares.
Head to the next page to see what are five of hedge funds’ favorite stocks.
Let’s start with Capstone Turbine Corporation (NASDAQ:CPST), in which there were nine investors holding shares at the end of September 2017. The stock is up by 33.40% since then and in October it traded mostly above $1 per share. Capstone Turbine Corporation manufactures microturbine technology solutions for power generation, including combined heat and power, renewable energy, natural resources and critical power supply. Back in 2014, Capstone Turbine Corporation (NASDAQ:CPST) traded at well above $30 per share, but the drop in oil prices that resulted in less demand for its products. However, the company has reshaped its business model to focus on renewables and in the last several quarters, its revenue has showed signs of growth. Capstone Turbine Corporation (NASDAQ:CPST) has also secured several contracts and embarked on a cost-cutting program over the last year.
Then there’s Seadrill Ltd (NYSE:SDRL), which saw 10 investors from our database holding shares heading into the last quarter of 2017. Once the largest drilling rig operator in terms of market value, Seadrill Ltd (NYSE:SDRL) was hit hard when oil prices went south. In September, the company filed for bankruptcy, but it has high hopes that it will get through bankruptcy in less than a year. The company’s current plan involves offering existing shareholders 2% of the company and 15% to unsecured bondholders, but two other groups have also submitted their plans. Recently, Seadrill Ltd (NYSE:SDRL) has postponed a hearing on its restructuring plan for the third time, leaving more time to consider alternative proposals.
Gastar Exploration Inc (NYSEAMERICAN:GST) is another oil & gas company that was hit by the slump in oil prices. However, the company has adjusted to the changes and has taken measures to stay afloat. Most recently, Gastar Exploration Inc (NYSEAMERICAN:GST) has sold its interest in the West Edmund Hunton Lime Unit for $107.5 million. The deal will allow Gastar to fund its core STACK acreage development and the company plans to drill and complete 20 wells this year. There were 10 funds tracked by us long Gastar Exploration Inc (NYSEAMERICAN:GST) at the end of September.
In Curis, Inc. (NASDAQ:CRIS), the number of funds holding shares stood at 10 at the end of September. Curis, Inc. (NASDAQ:CRIS) is a clinical-stage biopharmaceutical company that is seeking to develop drug candidates for the treatment of cancers. The company’s stock is down by 69% over the last year, as it continues to burn through cash to fund its R&D on several drug candidates. In January, Curis, Inc. (NASDAQ:CRIS) launched a Phase 1 clinical trial of small molecule IRAK4 kinase inhibitor CA-4948 in lymphoma patients. IRAK4 or Interleukin-1 receptor-associated kinase 4, is a molecule inhibitor used in precision oncology and there are several major pharmaceutical companies also working on IRAK4 inhibitors.
Finally, WMIH Corp. (NASDAQ:WMIH) is by far the most popular penny stock among the hedge funds we track, as 22 funds held shares of the reinsurance company at the end of the third quarter of 2017. In 2014, WMIH Corp. (NASDAQ:WMIH), formerly known as Washington Mutual, got a large investment from KKR & Co. L.P. (NYSE:KKR) and the company was supposed to be a special purpose acquisition vehicle, although it hasn’t made any acquisitions since 2014.
Disclosure: none
