Investing in penny stocks is primarily the domain of highly risk-averse market participants. The risk profile of penny stocks is, of course, a double-edged sword: investors could lose a lot of money on them, yet could also reap massive returns. Many investors do consider penny stock purchases, but there are significant differences between trading them and higher-priced stocks.
We reached out to Finance Professor Andrei Simonov at the Eli Broad College of Business at Michigan State University. We wanted to know whether he believes penny stocks to be a worthwhile investment, or if they are simply too risky to merit a position within one’s respective portfolio.
By ‘Penny Stocks’, different people understand different things. Mostly, it is the term used for “microcaps” or “nanocaps” sometimes not listed on any national exchange, mostly illiquid with high trading cost (Bid-Ask Spread) and high price impact of the trade. That would be OK, but in many cases, this is paired with a lack of verifiable fundamental information. That makes Penny Stocks prone to manipulation and different kinds of fraud. I believe that most small individual investors should avoid those stocks. However, there are other examples. In 2009, Citigroup was formally a penny stock. Granted, it was a highly speculative investment at a time. But “fallen angels” like that are worth looking at.
Professor Simonov clearly falls nearer the conservative end of the investor spectrum, which is understandable given his position. It’s true that penny stocks often lack the transparency and long financial track records of large-cap stocks. And yes, penny stocks will remain subject to unscrupulous businessmen who maliciously issue penny stocks with fraudulent intent. Thus, investors do need to tread carefully and conduct as much due diligence as possible in this asset class. With common sense and due diligence penny stock investors can succeed.
Volatility is high across markets. Interest rates are low. Investors are facing risk no matter where they look, and the investment landscape isn’t what it was a few years ago. It may be time to give penny stocks another look. Nevertheless, there are not only ‘fallen angels’ as Simonov suggests, but also emerging champions within the sector also worthy of investor speculation.
For the risk-averse investor here is a list of seven penny stocks worth the risk:
- Boxlight Corporation (NASDAQ:BOXL)
- Biocept Inc. (NASDAQ:BIOC)
- Ampio Pharmaceuticals (NYSEAMERICAN:AMPE)
- eMagin Corporation (NYSEAMERICAN:EMAN)
- Lynas Corporation Limited (ASX:LYC)
- Ucore Rare Metals Inc (OTCQX:UURAF)
- Byrna Technologies (CNSX:BYRN)
Bear in mind that these stocks all have catalysts making them worth a look. In many cases, a single macroeconomic catalyst alone will trump all other factors when evaluating penny stocks. For example, the stock of a company that benefits from a new federal mandate may provide massive returns after years of lackluster performance. Therefore, an appetite for risk, some luck, and calculated hedging of bets can equate to massive windfalls in penny stocks.
Boxlight Corporation (BOXL)
Education is undergoing a big transformation around the world. And technology has been the darling of the pandemic. Fotunately, EdTech sits squarely at the confluence of these two sectors. Investors are curious to know what stocks exist therein.
Boxlight Corporation is one such company. Like most small-cap stocks, they aren’t a household name. The company develops and services eLearning software for the classroom. Essentially, this firm will seek to establish itself as a leader in this burgeoning sector. Their solutions include interactive digital software, 3D printing and robotics STEM-related assets, and certifications to name a few. Among them is its MimioConnect cloud platform for remote teaching and learning.
In early July the company announced the appointment of two board members who should provide great direction. They have multiple decades of experience at highly respected forms in the industry.
The firm also recently won two excellence awards from Tech & Learning magazine. Boxlight corporation has developed a lot of software and resources which give it many avenues to rise. BOXL shares eclipsed $4 per share in early July after having traded around $1 for the previous year. Current shares are near $2.65.
Biocept Inc. (BIOC)
Given the search for a Covid-19 vaccine, this list could have easily been all biotech penny stocks. There are many exciting sectors and stocks elsewhere, but here I will focus on two of them.
Biocept is a company involved with a Covid-19 vaccine. Primarily, the company deals with cancer diagnostics. The firm is undertaking a vote in order to do a reverse split of its stock to raise its price above the NASDAQ $1 minimum closing bid requirement. It will be delisted if shareholders vote against the reverse split. Clearly it is a volatile stock, yet it serves a noble cause in an important market.
Biocept’s involvement with a vaccine is bound to pique the interest of speculative investors. The company has assembled a Covid-19 testing kit which will be available in Q3 2020. It is clear the company is attempting to remain relevant with these two latest moves.
Ampio Pharmaceuticals Inc. (AMPE)
Ampio Pharmaceuticals is another biotech company that is throwing its hat in the Covid-19 ring. Its primary business is the development of anti-inflammatory drugs against disorders including osteoarthritis and diabetic eye issues.
Ampio Pharmaceuticals has been active in the news in the last week as it relates to the pandemic. Additionally, Ampio’s drug Ampion is being touted as a treatment against inflammatory syndromes related to Covid-19. The company published a study to that effect on July 20. On July 23 it enrolled patients into its Ampion Covid-19 Program.
Should the results prove positive, this stock could rocket upwards from its current $1.17 price.
eMagin Corporation (EMAN)
eMagin produces OLED microdisplay technology. Its organic light emitting diodes have application in military, consumer, medical, and industrial markets. The company’s share price has been marching solidly upward in a consistent channel pattern for the past year, having risen from 32 cents to roughly $1.20. Such a 300% price increase is certain to entice more investors.
Unlike some other penny stocks, EMAN shares have lots of financial information with which to conduct due diligence.
Lynas Corporation Limited (LYC)
Lynas Corporation is a rare earths miner. There are many such companies, but what sets Lynas apart is one powerful catalyst: its strategic partnership with the U.S. Government.
The U.S. Government is worried about its ability to produce strategically important minerals. It is particularly worried about its over-reliance on China for strategic minerals used across industries. To that end it has given a contract to Lynas, an Australian company with significant operations in Malaysia. The contract will allow Lynas to begin building a heavy rare earth separation facility in Texas.
When completed, the facility will be the only plant which can separate such metals outside of China. This should make clear the strategic importance of the contract. This looks like a potentially huge business with massive growth potential.
Shares currently trade in the $2.50 range but jumped on the news. The Texas facility design will be ready sometime in 2021. U.S.-China tensions will dominate headlines perhaps for several decades. Thus, shares in companies like Lynas, which benefit from that reality, have great potential to grow for a long period.
Ucore Rare Metals Inc. (UURAF)
Ucore Rare Metals may rise for the same reason that Lynas has risen. However, this seems to be much more speculative. Lynas is clearly a legitimate company with real operations. Ucore has much less transparency behind it. Its website is very thin on information. Nevertheless, it is a stock to keep an eye on.
The company has supposedly developed a new, efficient process for separating and purifying rare earth elements. If it indeed aligns itself with U.S. national defense and can deliver, it should rise exponentially.
Byrna Technologies (BYRN)
Byrna Technologies is attempting to fill a void in the self-defense market. The company produces what looks like a gun that fires bullets but actually fires chemical irritant projectiles. Basically, pepper spray paint balls. The company is trying to fill the void between close-range pepper spray, and longer-range guns which fire lethal bullets. Further, the projectiles are non-lethal and are intended to disarm attackers, or give users ample time to flee.
Byrna may have cornered a large market of American self-defense consumers. Many Americans do not want the responsibility and potential liability associated with gun ownership. However, they do want to protect themselves. Byrna’s products neatly provide a solution for these consumers. Therefore Byrna may have identified a lucrative revenue base. Byrna’s shares have traded below 50 cents CAD since 2013. Shares only recently rose to around 1.70 CAD in June.
It may be time to give a few of these penny stocks a serious look. Investors are facing volatility with most any stock. Therefore, now may be as good a time as any to take a risk. These shares are a good place to start.
By Alex Sirois