Penny Stocks are highly risky investments, although if picked correctly, they can also translate into very high returns. Most penny stocks trade over-the-counter and are quoted on separate boards, like the OTC Bulletin Board or OTC Link and have low trading volumes and may trade infrequently, which may create difficulties when selling the shares. However, there are also many penny stocks trading on major exchanges, such as the NYSE or NASDAQ, where they are more regulated and slightly less risky, since companies are required to disclose more information and are watched more closely by regulators.
Despite their speculative nature and other concerns, penny stocks should not be avoided altogether, since there are many companies whose stocks once traded under $5 per share, but eventually managed to make it big (here are some of the most successful penny stocks in history). If one decides to invest in penny stocks, or stocks that are priced under $5 per share, as defined by the Securities and Exchange Commission, the best way to start is to focus on stocks that are trading on major exchanges. Then it’s important to identify why the stock is trading below $5. In some cases, a stock can be cheap because the company is an emerging one and is just starting to operate, so we have to determine whether the company and its product has potential. In other cases, a stock might have tanked, so it’s important to assess the underlying causes of the decline, which can be either related to the company’s operations, or can be industry or sector-specific, which is why we have to assess if the company has a chance to turn around.
As a rule, smart money investors don’t bother with penny stocks, some are prohibited from doing so by regulations, others are just to large to get any substantial benefit that would justify the risk. Some hedge funds do invest in penny stocks on a regular basis, but the majority of them hold or invest in companies whose stock tanked from much higher levels and they are either sticking to their bullish thesis or are betting on the company returning to its former glory.
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Therefore, the hedge fund sentiment is a metric that should not be overlooked when it comes to picking penny stocks, even though they are much less popular than large companies, for obvious reasons. At Insider Monkey, we track the hedge fund sentiment towards thousands of stocks, as part of our small-cap strategy (read more details). In addition, we can identify the most popular penny stocks among hedge funds. For example, at the beginning of September, we covered 15 most popular penny stocks among hedge funds and six months later, we can see that most of those picks have generated positive returns.
In this article, we are going to focus on a particular group of hedge funds, those that are managed by billionaires. Among billionaire investors, there are a few that are long a handful of penny stocks, most of which are companies, whose stocks declined in the last couple of years. We have selected the most popular penny stocks among billionaire investors and on the next page we are going to take a closer look at these companies.