Penny Stocks represent a very risky investment, but also one that might provide a great amount of profits if chosen wisely. However, with literally hundreds of thousands of penny stocks on the market, it’s really difficult to know which ones represent real companies that might gain more ground in the medium- to long-term, and which ones are just schemes to manipulate you into wasting money.
Here’s where we come to help you. One of the most certain ways to pick penny stocks is to follow hedge funds into them. Hedge funds don’t play around with a couple of thousands of dollars when it comes to buying a stake in a company, so they must conduct due diligence on each stock they intend to buy, which is why imitating their picks in the penny-stock space is a safer way to get some profits. Another idea is to follow hedge funds into their small-cap ideas, which the Insider Monkey strategy is all about. We have determined that imitating most popular small-cap stocks among hedge funds, can help retail investors generate double-digit annual alpha by analyzing their 13F filings between 1999 and 2012. Based on our research, we have developed a small-cap strategy that involves imitating 15 most popular small-cap stocks among over 700 hedge funds and it has returned over 118% in the last three years, beating the market by more than 60 percentage points (read more details here).
With this in mind, we have compiled a list of five stocks that trade under $1 per share, which are the most popular among the investors from our database. On the fifth spot is is LeapFrog Enterprises, Inc. (NYSE:LF), a $64 million developer of toys and educational entertainment for children, whose stock has slid by 80% since the beginning of the year. Among the hedge funds we track, 17 were bullish on the company at the end of June, holding $84.14 million worth of stock, which represented 8.50% of its outstanding stock. David E. Shaw‘s D.E. Shaw held the largest stake in LeapFrog Enterprises, Inc. (NYSE:LF) at the end of June, disclosing 1.65 million shares in its latest 13F filing, followed by John W. Rogers’ Ariel Investments, which initiated a position during the second quarter containing 917,500 shares of LeapFrog Enterprises, Inc. (NYSE:LF).
SandRidge Energy Inc. (NYSE:SD) was included in the equity portfolio of 18 funds from our database at the end of June, although the value of their stakes slumped to $97.59 million from $241.42 million three months earlier. However, as the stock lost 70% of its value during the second quarter, investors that we track still amassed around 23% of the company. Moreover, a number of funds from our database more than doubled their stakes in SandRidge Energy Inc. (NYSE:SD) between April and June. Among them, Cliff Asness’ AQR Capital Management and Israel Englander’s Millennium Management, raised their positions by 149% and 162% to 3.72 million shares and 1.69 million shares. The largest shareholder of SandRidge Energy Inc. (NYSE:SD) in our database was Prem Watsa’s Fairfax Financial Holdings, which held 50.89 million shares worth $44.45 million; the position accounted for 3.25% of its 13F portfolio at the end of June.
Hedge funds also don’t stay away from healthcare penny stocks and their favorite is XOMA Corp (NASDAQ:XOMA), a $93 million developer of antibody-based therapeutics. Biotech stocks represent a nice bet, since they can skyrocket in a very short time if the company manages to succeed with one of its developments. Xoma Corp’s stock entered the penny-stock range after a significant slump at the end of July, after the company said that its Phase 3 study of gevokizumab in patients with Behçet’s disease uveitis did not meet its primary endpoint. Nevertheless, in August, Wedbush Securities reiterated its ‘Buy’ rating on the stock and lowered the price target to $11 from $13, which still represents a large premium on the current price. Among the funds from our database, 20 investors held stakes in XOMA Corp (NASDAQ:XOMA) with an aggregate value of $142.16 million at the end of June, up from 16 funds with long positions worth $1.13 million a quarter earlier. Moreover, these investors held over 31% of the company at the end of the second quarter. Julian and Felix Bakers’ Baker Bros. Advisors was the largest shareholder of XOMA Corp (NASDAQ:XOMA) in our database at the end of June, owning 14.68 million shares.
The next two companies will also be from the energy sector. In Key Energy Services, Inc. (NYSE:KEG), 20 funds reported stakes with an aggregate value of $81 million at the end of June. During the second quarter, the number of investors with long positions declined by eight, but the total value of their positions increased from $72.55 million at the end of March. Key Energy is an onshore, rig-based contractor that provides well servicing and its stock has lost over 90% over the last 52-weeks. However, its 52-week high amounts to $5.70, and its consensus price target from analysts amounts to around $3.00 per share. Among the funds from our database, Mark Rachesky’s MHR Fund Management owns the largest stake in Key Energy Services, Inc. (NYSE:KEG), which contained 17.48 million shares, worth $31.47 million and accounting for 1.30% of its equity portfolio. On the second and third spots are Ken Griffin’ Citadel Investment Group and Jim Simons’ Renaissance Technologies, which increased their holdings in Key Energy Services, Inc. (NYSE:KEG) by 116% and 16% on the quarter to 12.89 million shares and 2.80 million shares respectively.
Finally, there is Penn Virginia Corporation (NYSE:PVA), a $65 million independent oil & gas company, who reached the “penny stock territory” after its share price declined by over 90% over the last 52-weeks. The stock currently trades far away from its 52-week high of over $14 per share, hence hedge funds might be betting on its rebound. According to our data, at the end of June, 21 hedge funds held around $109.23 million worth of stock, representing almost 35% of the company. Even though Penn Virginia Corporation (NYSE:PVA) lost some popularity during the second quarter and slid by another 80%, the overall hedge fund sentiment is still bullish. It’s even more important to mention that billionaires George Soros‘ Soros Fund Management and Israel Englander’s Millennium Management hold are among the company’s top three shareholders in our database, holding over 6.0 million shares and 3.53 million shares respectively. Moreover, Millennium Management boosted its position sevenfold during the second quarter.
Disclosure: none
