We recently compiled a list of the 8 Most Profitable Penny Stocks To Invest In. In this article, we are going to take a look at where Gerdau (NYSE:GGB) stands against the other profitable penny stocks.

Potential in Small-Caps

The misallocation of capital to less productive sectors can lead to inflationary pressures and hinder economic growth. A lot of experts now suggest that investors should be cautious and focus on small and mid-cap stocks (SMid caps) that may thrive in a low-interest rate environment. The overall strategy involves updating price targets for companies sensitive to interest rates that also show strong revenue and earnings growth potential in a soft landing scenario. As September was concluding, Curtis Nagel, senior US SMid cap internet analyst at BofA Securities, appeared on CNBC to discuss the potential opportunities in small-cap stocks as the Fed made its cut decision. Here’s a short excerpt from the article 7 Best Small Company Stocks To Invest In that discusses this in more detail:

“Curtis Nagel shared his insights on the performance and potential opportunities in small and mid-cap stocks following the Fed’s rate cut. While the Russell 2000 index has underperformed the major averages since the rate cut, he believes this could spell big opportunities for SMID-cap stocks across various sectors, including home furnishings and subscription services.”

With the upward revision of price targets for companies with high sensitivity to interest rates, SMid-cap stocks are seen as a promising area for investors. Yet, some experts tend to disagree based on the recent small-cap performance.

Tom Lee, Fundstrat co-founder, joined ‘Power Lunch’ on CNBC on October 7 to discuss the staying power of the bull market, touching on small caps, and his overall market outlook. As most market analysts highlight the resilience of the bull market amidst looming threats, particularly with the US elections just 4 weeks away, Tom Lee expressed optimism about the S&P 500, suggesting it could close at 5,700 or even higher by the year-end. He attributed this potential growth to a dovish Fed beginning to cut rates and the stimulus measures being implemented in China, which he believes will positively impact the market. With significant cash still on the sidelines, Lee sees a favorable environment for stocks over the next 3 to 12 months.

Despite Lee’s bullish outlook, he acknowledged that small-cap stocks have exhibited weakness since the Fed began raising rates. He noted that while small caps are within a few percentage points of their all-time highs, they have not performed as well as expected. The market’s current risk appetite is mixed, and with the upcoming election and elevated oil prices contributing to uncertainty, investors may be hesitant to take on new risks.

When discussing oil prices, Lee pointed out that any disruption in Iranian oil supplies, accounting for only about 3% of global output, could have psychological effects on the market. While such an interruption might not significantly impact economic terms, it could lead to increased volatility and consumer pain if oil prices surge. He emphasized that markets generally dislike uncertainty, and even temporary spikes in oil prices could create discomfort for consumers.

While there are challenges ahead, especially with the election approaching, the underlying economic conditions and potential policy shifts could provide opportunities for investors. The interplay between monetary policy, geopolitical factors, and market sentiment will be crucial in shaping market dynamics in the coming months. The market needs to be carefully watched before investor decisions can be made and to help you streamline your research process.

Methodology

We sifted through Finviz to compile an initial list of the top penny stocks, with a share price under $5. From that list, we narrowed our choices to 15 companies with positive TTM net income and 5-year net income compound annual growth rate. We then selected the 8 stocks that were the most popular among elite hedge funds and that analysts were bullish on. The stocks are ranked in ascending order of the number of hedge funds that have stakes in them, as of Q2 2024.

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 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

Gerdau (NYSE:GGB)

TTM Net Income: $905.6 million 

5-Year Net Income CAGR: 20.57%

Share Price as of October 9: $3.46

Number of Hedge Fund Holders: 15

Gerdau (NYSE:GGB) is the largest producer of long steel in the Americas, producing a range of steel products, including long steel products like rebar and wire rod, and flat steel products like hot-rolled and cold-rolled coils. It serves various industries, including construction, automotive, and manufacturing. Its financial performance is influenced by factors such as global steel demand, commodity prices, and economic conditions.

In the second quarter of 2024, the company’s earnings per share value was at $0.07. The revenue generated in this period was $2.94 billion, recording a decline of 21.23%. This decline was followed by missed Street expectations for the quarterly revenue. This was primarily due to an oversupply in the steel market, increased competition from imports, and a decrease in crude steel production and shipments. Gerdau (NYSE:GGB) experienced a 5.3% drop in production and a 7.5% decline in shipments year-over-year, leading to lower sales prices.

The US automotive market is recovering, reaching 16 million units in 2024. Brazil’s special steel market is optimistic due to a 32.1% growth in heavy-duty production. However, uncertainties and imported steel remain challenges. The company improved its steel production capabilities. Argentina’s steel market is recovering slowly from a low point due to inflation. Uruguay’s steel consumption remains strong. Peru’s GDP grew 5.5%, driven by construction and other sectors. Brazil’s long and flat steel market faces challenges from imported steel and production disruptions. However, positive indicators for the construction industry are expected.

Despite short-term challenges, the company’s prospects remain positive, driven by industry recovery, increased production efficiency, and favorable economic conditions in key markets. Its strategic focus on innovation and market diversification positions it well for long-term growth.

Overall GGB ranks 2nd on our list of the most profitable penny stocks to invest in. While we acknowledge the potential of GGB as an investment, our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than GGB but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.

Disclosure: None. This article is originally published at Insider Monkey.