We recently compiled a list of 8 High Growth Penny Stocks That Are Profitable in 2024. In this article, we will look at where Kosmos Energy Ltd. (NYSE:KOS) ranks among high-growth penny stocks that are profitable in 2024.
Do Small Cap Stocks Offer More Value?
Many investors and analysts are concerned regarding the valuations of large-cap stocks and there is a growing concern that maybe the turn is coming for small and mid-cap stocks.
Brent Schutte, Chief Investment Officer of Northwestern Mutual Wealth Management Company joined CNBC to discuss how small caps offer more value. Schutte mentioned the 1999 and 2000 markets which were very similar to the current market. During that time the market became very narrow, he thinks that the current market is barely holding up. To explain his point he mentioned the manufacturing market and the lower and middle income consumers have been harmed by the interest rate hike over the past years. Schutte does not see the Fed being able to alleviate the suffering market and what consumers have been through and believes that how the economy will perform in the future remains an unanswered question.
For investors who are more interested in returns over a 3 to 5-year period, small-cap stocks regardless of a soft landing or not, offer value as these stocks are priced for recessions. On days when interest rates rise, large cap stocks, particularly those in the S&P 500, tend to perform better while small-cap stocks often decline. However, Schutte argued that there is a debate about how much of the current economic situation is already reflected in stock prices. He thinks optimism is a contrarian indicator, meaning when many believe stocks will rise, it could signal a downturn. He suggests that as investors the strategy of investment should be towards undervalued stocks where optimism is low, suggesting that this approach may yield better returns as conditions change and currently small caps are undervalued indicating better returns.
On the other hand, Tom Lee, managing partner and head of research at Fundstrat Global Advisors, who has been backing up the small-cap bull case thesis, thinks that there is a lot of firepower supporting stocks post-elections.
He recently joined CNBC in another interview expressing his caution before the election period but optimism as soon as the new president takes charge. He noted that many investors are sitting on the sidelines until they have clarity on the presidential outcome and mentioned that he advises his clients to buy the dip as he expects potential market recovery post-election.
Lee believes that once the election is behind us, there is significant “firepower” supporting stocks. He expects a decent rally, with a target for the S&P 500 around 6,000. He thinks this because of a dovish Federal Reserve and a healthy economy. Unlike Schutte, Lee does not foresee a recession in the near term. He however does acknowledge concerns about stock valuations being stretched, particularly with the S&P 500 trading above its historical average. He argued that this is misleading due to the higher multiples of top-performing stocks.
Lee has been bullish on small-cap stocks, we have covered his bullish sentiment in 8 Most Undervalued Penny Stocks To Buy According To Analysts. Here’s a piece from the article:
“To talk about what the stock market looks like today and in the near future. Tom Lee, co-founder of Fundstrat Global Advisors joined CNBC in a recent interview. He has been one of the strong proponents and supporters of small-cap stocks. Lee says that we are in a volatile environment currently, due to a few reasons, one being the elections in less than 30 days, the second being the Middle Eastern crisis which is scaring investors, and lastly the port strike that has the potential to cripple the economy. However, he still expressed his optimism that the year-end has a lot of tailwinds and investors shouldn’t be afraid to buy the dip. Moreover, Lee also highlighted that these current events are all short-term headwinds in a buying cycle and are expected to die down quickly.
Lee thinks that bottoms are tough and processed, and small caps are in the process of what could be a multi-year bottom. Therefore the conviction is that some people might want to buy the big names on NASDAQ and the AI market, however, with small caps trading at lower multiples of P/E less than 10, the risk and reward lie in small caps. Lee further mentioned that interest rate cuts and better earnings growth make the path for small-cap growth more visible.
Tom Lee has also reaffirmed his belief that the S&P 500 could close above 5,700 by year-end, supported by strong economic fundamentals and a dovish Federal Reserve beginning to cut interest rates. He noted that significant cash reserves are available for investment, which could drive stock prices higher in the next three to twelve months.”
Our Methodology
To get the list of 8 high growth penny stocks that are profitable in 2024 we relied on the Finviz stock screener, Yahoo Finance, and Seeking Alpha. Using the screener we got a consolidated list of stocks which are trading below the share price of $5 with positive forward P/E, and more than 8% sales growth during the past 5 years. For this aggregated list we sourced the 5-year net income growth and revenue growth rates from Seeking Alpha and the GAAP trailing twelve-month net income from Yahoo Finance. Lastly, we ranked our stocks based on the number of hedge fund holders as per Insider Monkey’s Q2 2024 database. Please note that the share prices were recorded on October 12 and that the list is ranked in ascending order of the number of hedge fund holders.
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).
Kosmos Energy Ltd. (NYSE:KOS)
Share Price: $4.48
5-Year Net Income Growth: 61.60%
5-Year Revenue Growth: 8.88%
TTM Net Income: $258.32 Million
Number of Hedge Fund Holders: 25
Kosmos Energy Ltd. (NYSE:KOS) is an independent oil and gas company that specializes in exploring and producing energy resources from deepwater locations, primarily along the Atlantic Ocean’s margins. It operates in mainly four geographical regions including Ghana, Equatorial Guinea, Mauritania/Senegal, and the U.S. Gulf of Mexico.
The oil and gas exploration company is making significant progress toward its production goals, with recent successful projects contributing to its output. The company has successfully started oil production at the Jubilee Southeast and Winterfell projects, alongside enhancement efforts in the Gulf of Mexico. By the end of the year, it anticipates contributions from the GTA project and infill drilling in Equatorial Guinea, aiming for a year-end production target of around 90,000 barrels of oil equivalent per day.
One of the key differentiating factors for Kosmos Energy Ltd. (NYSE:KOS) is its focus on quality over quantity. This approach follows a multi-year investment cycle, with capital expenditures expected to decrease as projects are completed. It expects to generate significant free cash flow once all the projects are operational. Management expects its cash flow to be between $100 million and $150 million per quarter. This cash flow will primarily be used to pay down debt, enhancing financial stability.
During the second quarter of 2024, the company reported production of 62,000 barrels of oil equivalent per day, marking a 7% increase year-on-year. This was, however, towards the lower end of its guidance due to reduced output from the Jubilee field and delays in the Winterfell project startup.
However, on the bright side, the cost of production was well within its guidance, and operating expenses were below expectations indicating operational efficiency. Kosmos Energy Ltd. (NYSE:KOS) now expects to produce around 67,000 to 71,000 barrels per day, a slight adjustment due to the challenges from Jubilee and Winterfell locations.
These challenges are short-term headwinds as the company has established fundamentals demonstrated by its 5-year performance. Over the past 5 years, its top line has grown by 9% and the bottom line has improved by more than 61%, thereby making it one of the high-growth penny stocks that are profitable in 2024.
Patient Capital Management made the following comment about Kosmos Energy Ltd. (NYSE:KOS) in its Q3 2023 investor letter:
“We added to our energy exposure in the quarter, buying shares in Kosmos Energy Ltd. (NYSE:KOS), an exploration and production services company with assets in Africa. The company is differentiated in the exploration & production (E&P) space because of its growth profile (+30% YoY in 2024), long reserve life (>20yrs, nearly double the sector average) and focus on liquified natural gas (LNG). We see this as a classic case of time arbitrage where the market is myopically focused on the near-term risk the company will miss production targets for new assets while ignoring the long-term intrinsic value. After years of investing in project development, it is close to moving into the harvesting phase with production expected to grow 30% YoY in 2024. At the same time, capital expenditures should fall 30% YoY leading to very strong FCF yield of >25%, which will initially go towards debt paydown. At these levels, the company will generate more than its current market cap in FCF over the next 5 years at $90 Brent prices. With the combination of gas-heavy reserves and inflecting cash flow generation, we think Kosmos is significantly undervalued and a potential acquisition target.”
Overall KOS ranks 1st on our list of high-growth penny stocks that are profitable in 2024. While we acknowledge the potential of KOS as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for a promising AI stock that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure. None. This article is originally published on Insider Monkey.
