We recently compiled a list of the 10 Best Quality Penny Stocks To Buy. In this article, we are going to take a look at where RLX Technology Inc. (NYSE:RLX) stands against the other quality penny stocks.

Penny stocks are shares of small companies that usually trade for less than $5 per share. They are often found in smaller or newer businesses and tend to be more volatile and risky because they can rise or fall in value quickly.

Many penny stocks trade on smaller exchanges or over-the-counter (OTC) markets rather than major stock exchanges. While they can offer big rewards if a company grows, they also come with higher risks, as these companies may have unstable finances or less information available to investors.

Most penny stocks usually fall under the small-cap stocks category. However, that is not always the case. Some large companies with high market caps have low share prices due to several factors, even though they are well-established and stable. The most common reason is share dilution.

When a company issues a large number of shares, its share price can be low, even if the company is worth billions overall. We have some companies on our list that fall into the category. This does not necessarily mean the company is struggling or risky like typical penny stocks but the low share price is due to the way its shares are distributed rather than poor performance or instability.

Sustainable Growth Expected in Small Caps Amidst Market Shifts

On July 26, Nathan Moser, Managing Director and Senior Portfolio Manager at Impax Asset Management joined Schwab Network and discussed some long-term possibilities around small-cap stocks. He discussed the recent changes in small-cap stocks and highlighted the positive shift.

He noted that after years of struggles, the recent rise in small caps seems more sustainable, which is driven by strong inflows into ETFs and passive investment vehicles. Moser believes the market’s current move could last for years, despite some short-term volatility, and encouraged buying on any market dips.

Moser pointed out that sectors like regional banks, real estate, and housing have performed well, most likely because investors believe that the Federal Reserve may delay or avoid a recession. He said that the recent rise is just the beginning and compared it to the early stages of a baseball game, with more room for growth in the small-cap sector.

He said, “We’re in the first inning of this move, in my opinion.” However, he advised to keep focus on high-quality, profitable companies due to the risks associated with lower-quality stocks in small caps.

Our Methodology

For this article, we identified 30 quality penny stocks trading under $5, as of September 3. The stocks we identified are profitable, have real sales, and are expected to remain profitable in the future as well. We narrowed down the list to 10 stocks most widely held by institutional investors. We listed the stocks in ascending order of their hedge fund sentiment.

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).

RLX Technology Inc. (NYSE:RLX)

Stock Price as of September 3: $1.68

Number of Hedge Fund Holders: 14

RLX Technology Inc. (NYSE:RLX) is a China-based company that is a leading player in the e-vapor industry. Through its subsidiaries and a variable interest entity, the company focuses on developing, manufacturing, and selling e-vapor products. Its operations span the entire supply chain, from production to offline distribution as the company aims to provide high-quality, compliant products for adult smokers.

The company targets consumers with varying income levels through its new product lines. In China, the introduction of the mega-sized Daqian series, featuring 6-ml and 10-ml pods at more affordable prices than its flagship Infinity pods, provides value-conscious consumers with cost-effective alternatives. This move helps the company grow stronger in its home market by meeting the rising demand for affordable products while maintaining good quality.

For international markets, RLX (NYSE:RLX) has launched the RELX Pod Pro series, which offers up to 1,000 puffs per pod, nearly double the capacity of standard pods, which delivers a better value for consumers in regions with different economic conditions. The company tailors its product lines to meet the specific needs of different income groups, which broadens the company’s market appeal and puts it in a stronger competitive position across global markets.

RLX (NYSE:RLX) reported its Q2 results on August 16. While the company’s revenue missed the analyst estimates by a slight margin, the revenue showed a nearly 66% increase at $86.3 million. Its EPS of $0.02 was in line with the estimates and was up 100% year-over-year.

Analysts see the company stock in a positive light as all 4 analysts that have covered the stock maintain a Buy-equivalent rating with an average price target of $2.76. It represents over 64% upside to the company’s stock at current levels on September 3.

In the second quarter, 14 hedge funds had stakes worth $60.8 million in RLX (NYSE:RLX). As of June 30, Wildcat Capital Management is the company’s most prominent stakeholder with 18.046 million shares worth $33.2 million. This brings the company to the 5th position on our list of best penny quality penny stocks to buy.

Overall RLX ranks 5th on our list of quality penny stocks to buy. While we acknowledge the potential of RLX 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 an AI stock that is more promising than RLX 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. This article is originally published at Insider Monkey.