We recently compiled a list of the 10 Best Value Penny Stocks to Invest in Now. In this article, we are going to take a look at where Profire Energy, Inc. (NASDAQ:PFIE) stands against the other value penny stocks.
The US market has been resilient over the past years despite higher interest rates, however, recent reports showed a sharp decline in the growth of the U.S. job market. According to reports from the Labor Department, the economy added just 114,000 jobs in July compared to 179,000 in June. This marks a sharp drop in employment generation from 482,000 in January 2023, raising the unemployment rate to 4.3% in July 2024, the highest level in nearly 3 years. The significant slowdown in hiring can potentially make the economy vulnerable to recession and therefore leads to an ease in monetary policy guaranteeing an interest rate cut in September. Economists are calling for a 50 basis point reduction in borrowing costs.
With the current uncertainty in the market and delay in rate cuts, investors are worried about a possible recession. The question is should investors pick penny stocks to diversify their portfolios? Penny stocks, though cheap, are without any doubt risky investments with a high rate of volatility and are even more sensitive to monetary policy changes. A higher interest rate negatively affects stocks’ earnings performance because these stocks are mostly running on debt and, therefore, can benefit from a possible rate cut in September 2024.
Moreover, these stocks are prone to speculative trading and scams, and therefore, are suitable for investors that can do diligent research and have a high tolerance for risk. However, not all stocks are the same and investors may yet benefit from long-term investments in high quality penny stocks with strong fundamentals. Value investing is an investment strategy focused on finding stocks that are being traded for less than their intrinsic or true value. In other words, value stocks are undervalued by the market and can be rewarding long-term investments once the market realizes their true value.
Investing in small-cap penny stocks is no doubt risky owing to their high volatility and low liquidity, however, using the value investing strategy one can generate long-term profits from investing in these stocks.
Investing in Small-cap Stocks in 2024
Most penny stocks have small market caps. Large-cap stocks generally dominate the market outperforming small-caps, and last year was no different as the large-cap stocks beat small-cap stocks by an average of 9.6 percentage points. Moreover, in 9 out of the last 10 years, large caps outperformed penny stocks, however, small caps showed competitiveness back in the days of the internet boom, when the dot-com bubble was breaking in the period 1999 to 2004.
There is hope for a small-cap rebound in 2024, and that is because the historical trends tell us that after nearly a decade of underperformance, the tables turn and small-caps, which include many penny stocks, can rebound. Moreover, in the fourth quarter of 2023, penny stocks showed a recovery in growth and this could set the stage for a renaissance for the small-caps in 2024.
In a recent interview with CNBC, Fundstrat’s head of research, Tom Lee expressed optimism about the potential rise of small-cap stocks in 2024 owing to the softening of inflation in June. Tom Lee further discussed the performance of the small-cap stocks that rose 30% in 8 weeks from October to December 2023. Lee believes that the current rally can be even more substantial compared to last year as it’s driven by factors like larger institutional short positions, small-cap even more oversold, and valuations like median P/E at 10 times 2025 earnings. In addition, June’s Consumer Price Index has declined to its lowest level in the last 3 years, this can lead to the feds cutting the interest rate expected in September 2024. According to the estimates of Tom Lee, in case the interest rate is cut down, the small caps can gain as much as 50% in 2024.
Secondly, presidential elections have been historically in favor of these stocks, research shows that seven out of eleven election times, the small-cap outperformed by an average of 2.68 percentage points.
The recent consumer price index data released in June 2024, suggests a deceleration in inflation, the prices are getting stabilized particularly in core consumer segments such as shelter and food. According to the latest Inflation report, the Personal Consumption Expenditure index (PCE) rose by 0.1% from April matching the Wall Street expectations. Furthermore, the report shows a growth of 0.5% in personal income in the U.S. which is up by $114.1 billion. This potential relief to consumers can stabilize the US market and might influence the Federal Reserve’s Monetary policy decisions in favor of small-cap by cutting interest rates as expected by the end of 2024.
Methodology:
To compile this list of the 10 best-value penny stocks to invest in, we used a screener to narrow down penny stocks trading under $5 on the basis of relatively lower forward p/e ratios compared to their respective industry averages. We further screened these stocks by using metrics like institutional ownership of greater than 40% and ensured that the companies had positive upsides based on analysts’ consensus.
After shortlisting the stocks based on the above-mentioned value metrics, we ranked those stocks based on hedge fund sentiment towards each stock. To rank the penny stocks, we assessed Insider Monkey’s database of hedge fund sentiment of 920 elite hedge funds and their holdings tracked at the end of the first quarter of 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).
An oil rig in the middle of an ocean reflecting the sunset.
Profire Energy, Inc. (NASDAQ:PFIE)
Number of Hedge Fund Holders: 7
Profire Energy, Inc. (NASDAQ:PFIE) is a technology company that is involved in the engineering and design of burner and combustion management systems. These systems manage and monitor the burners used in the oil and gas industry. The company primarily serves to enhance the efficiency, safety, and reliability of industrial combustion appliances in the upstream, midstream, and downstream transmission segments of the oil and gas industry.
President Biden’s administration announced a pause on pending and future permits for LNG exports in January 2024. The decision slowed down the oil industry capital expenditures to some degree, and may prove to be a headwind for traditional energy stocks.
However, LNG will continue to play a key role in the long-term solution for global energy. The demand for LPG and methane will grow by 1.9% annually in the 2022 to 2028 period, a forecast by the International Energy Agency (IEA).
Profire Energy, Inc. (NASDAQ:PFIE) has strong fundamentals as evident from the trailing P/E of 8.42 in contrast to the industry’s average of 20.47 which could mean the stock is undervalued compared to the overall industry, and we think it is not a value trap since the company has been growing its revenue for the past three years at an annualized rate of 5.42% and the EPS has also been improving for the past four years.
Moreover, analysts have estimated a forward P/E of 10.42 which means that the earnings per share are likely to improve for the current fiscal year. Profire Energy reported a Non-GAAP earnings per share of $0.03 which is in line with the expected EPS in Q1 2024.
The Q3 of 2023 was the second-best quarter in the company’s 21-year earnings history, the firm generated a record-breaking revenue of $14.8 million compared to $12.8 million in the prior year.
The stock was trading at an average price of around $1.3 in July which increased to $2.8 by the end of August and reached around $3 by the end of September 2023, roughly an upside of 130% from the initial price. This drastic price increase was due to a significant increase of 28% in oil prices globally, the oil prices were in the range of $70 to $80/barrel all year but reached $90/barrel in the third quarter of 2023 the highest price since mid-November 2022.
The surge in oil prices was attributed to the increase in demand for oil, a positive shift in the macroeconomic sentiment due to an ease in inflation, and most importantly OPEC’s announcement of production cuts. Moreover, the voluntary export cuts of Saudi Arabia and Russia amid increased demand for oil increased the price of oil products globally.
According to the U.S. Energy Information Administration energy outlook report of 2023, the projection suggests that Energy Vehicles (EVs) will represent just one out of every 5 light vehicles sold by 2035 through 2050 under a situation if fuel prices reach 190$ a barrel. The adoption of clean energy as a means of transportation faces challenges, as consumers are hesitant over the hefty pricing of EVs, a lack of enough charging stations, and range limitations.
Moreover, the charging stations need electricity made primarily out of coal and natural gas. Therefore, an increase in demand for electricity will likely increase the demand for fossil fuels and subsequently, the demand for combustion management products, and companies like Profire may benefit and grow further.
On May 22, 2024, Profire Energy, Inc. (NASDAQ:PFIE) announced the approval of its share buyback program. Under this program, the company can repurchase up to $2 million worth of its common stock till June 30, 2025. Repurchases will be under management’s supervision keeping in view the interest of the company’s stakeholders. This buyback program will increase earnings per share by cutting down the share count.
According to Insider Monkey’s database, 7 hedge funds held stakes in Profire Energy, Inc. (NASDAQ:PFIE) and Royce and Associates held the biggest stake with around 2 million shares worth $3.7 million.
Overall PFIE ranks 10th on our list of the best value penny stocks to buy. While we acknowledge the potential of PFIE 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 PFIE but 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 at Insider Monkey.
