Penny Stocks: Are They Worth the Risk?
Penny stocks refer to stocks that trade for less than $5 per share. They are typically small companies that trade over-the-counter or on the OTC. However, that doesn’t mean you won’t find them on major exchanges like the NYSE or NASDAQ. Penny stocks are known for being highly speculative investments that can provide tremendous returns but also come with substantial risk. This article will explore the world of penny stocks and help you determine if they are a good fit for your investment portfolio.
What Defines a Penny Stock?
The Securities and Exchange Commission (SEC) defines a penny stock as any equity security trading below $5 per share that does not meet certain net tangible assets or average revenue requirements. Many penny stocks trade for less than $1 and some even trade for pennies on the dollar.
They tend to be newer companies in emerging industries, though there are exceptions. Penny stocks are often associated with smaller companies because a low stock price allows a company to generate more shares for less capital raised. However, large companies can also be classified as penny stocks if their share price drops below $5.
The Risks and Rewards of Penny Stocks
Penny stocks offer the lure of massive gains, sometimes even over just a few days. A small company can see its stock double or triple in price based on a single press release about a promising new product or service. The problem is most penny stocks end up declining in price or going belly up. The long-term success rate for cheap stocks is estimated to be under 10%, so most investors lose money. The extreme volatility also makes penny stocks hard to value properly.
The lack of financial information on these companies contributes to the risk. Unlike large publicly traded companies, penny stocks are not required to provide as much financial disclosure and reporting. This makes it harder for investors to analyze the company’s financials to determine if the stock is under or overvalued.
The combination of unknown companies and limited data results in a lack of analyst coverage for most penny stocks. With fewer experts following the stocks, there tends to be less reliable third party analysis of the company’s business operations and management. This leaves investors to make decisions based largely on press releases from the companies themselves.
Finding the Good Penny Stocks
With so many risky penny stocks, how can you spot the good ones with high upside potential? Focus your research on finding companies with strong management teams and healthy financials. Look for penny stocks in growing industries like tech and biotech. Search for companies with innovative new products that excite investors.
Pay close attention to company press releases that announce product launches, partnerships, acquisitions, or other value-building events. Join stock message boards and follow the stocks getting buzz from other investors. Look for increased trading volume as a signal of positive momentum.
Always thoroughly research the company yourself too. Look at their filings with regulatory agencies to analyze the management and business fundamentals. Only invest money you can afford to lose and diversify across multiple penny stocks to watch.
Weighing the Risk vs. Reward of Penny Stocks
Penny stocks provide an opportunity for astute investors to realize exponential gains by identifying the few small companies poised for growth well before the crowd. However, most penny stocks never gain traction, leaving investors with losses. The trick is distinguishing between the pumps destined to dump and the penny stocks capable of turning into multi-baggers over time.
One of the more recent movers in the stock market is Femasys Inc. (NASDAQ: FEMY). Shares of the biotech company’s shares have exploded from around $0.30 to highs of $4.75 within a matter of days.
However, if you look at trading action in the stock market today, you’ll see that big gains can quickly turn into significant losses. FEMY stock reached those highs, briefly, then promptly pulled back below $3.35, a more than 30% drop. That’s why it’s important to understand how to trade penny stocks before diving in, head-first.
Penny Stocks To Watch
If you have an extremely high-risk tolerance, time to research thoroughly, and only invest money you’re willing to lose, penny stocks could be a good speculative option. Just be sure to diversify your portfolio beyond penny stocks alone. For most investors, penny stocks simply represent too much volatility versus readily available safer investments. In the end, you must weigh the allure of massive penny stock gains against the probability of losses and determine if that risk-reward tradeoff aligns with your investing goals.
- Petco Health & Wellness (NASDAQ: WOOF)
- Grab Holdings (NASDAQ: GRAB)
- Novo Integrated Sciences Inc. (NASDAQ: NVOS)
Petco Health & Wellness (WOOF)
Penny stocks aren’t just no-name companies with a vision for growth. As we’ve seen with the recent market sell-off and volatility over the last few years, penny stocks can also be companies with established brands. Petco is one of these “household stocks” and shares dipped to fresh 52-week lows of $3.72 at the end of September. Since then, however, WOOF stock has managed to bounce back above the $4 level.
With November right around the corner and the Black Friday sell-a-thon to ensue for retail stocks, momentum has built up. Petco has also identified this as a potential opportunity and announced its “Merry Makings holiday collection. “On top of newly added everyday value items at Petco, the new collection offers everything from stocking stuffers under $10 to oversized, stand-out products and premium gifts, making Petco the ultimate pet and pet parent destination this holiday season,” said Amy College , Chief Merchandising Officer at Petco. “Pets are treasured members of our families, and we’re helping pet parents focus on what matters most – making memories together.”
Will WOOF stock continue this trend into the holidays? Despite it’s massive sell-off this year, among analysts, B of A still maintains one of the highest WOOF stock forecast target prices at $10. It also has a Buy rating.
Grab Holdings (GRAB)
Hailed as the everything app, Grab Holdings has weathered an otherwise bearish storm for broader markets in 2023. In fact, GRAB stock is up over 35% since this time last year. Following an earnings beat for its second quarter, momentum has come back into the stock. It has also prompted attention from analysts.
Grab reported an EPS loss per share of $0.03 compared to the larger loss of $0.05 expected. The company also posted $567 million in revenue, which beat estimates of $546.12 million. The company anticipates 2023 revenue to come in between $2.2 billion and $2.3 billion while also raising EBITDA guidance for the year.
“We had a strong set of results for the second quarter. Deliveries GMV grew year-over-year (“YoY”) to hit record-highs, supported by our continued push on key affordability initiatives and an expanding GrabUnlimited subscriber base. More people are using Grab today than ever before, as we achieved our highest Monthly Transacting Users to date,” said Anthony Tan, Group Chief Executive Officer and Co-Founder of Grab. “Looking ahead, we will focus on making our platform more valuable to our driver- and merchant-partners, by providing them with tools and services to become more productive and engaged. Our aim is to continue fostering a flourishing ecosystem that enables them to thrive, while delivering sustainable growth for Grab.”
As for analysts, Citigroup, Benchmark, Barclays, Goldman Sachs, and Evercore ISI raised their GRAB stock forecast price targets. The range is now $4.50-$7 compared to $4-5.20.
Novo Integrated Sciences Inc. (NVOS)
Novo Integrated Sciences is another one of the sub-$1 names on this list of penny stocks to watch. The common thread has been biotech & life sciences. Novo specializes in holistic health and wellness. The company offers a technology-focused method for personalized care and virtual access, among other things.
A series of releases since the middle of August has prompted momentum in the penny stock. For instance, Novo and Farm 7 Group announced a joint venture for the Kenya Cooperative Agriculture project. Novo will be providing all administration and structured finance solutions to the joint venture.
Novo’s IoNovo Iodine was also granted regulatory approval by Turkey’s Ministry of Health as a dietary supplement at the end of August. In addition, The company received underwriter clearance for the transaction between Novo and RC Consulting LLC in favor of SCP Tourbillion Monaco. This is for the transaction of an unsecured 15-year $70,000,000 promissory note with the Buyer for debt funding of $57,000,000.
Most recently Novo inked a master collateral transfer agreement with Blacksheep. Robert Mattacchione, Novo’s CEO and Chairman of the Board, stated, “Novo has secured its core business capital needs with previously disclosed financings and financing opportunities. We believe the pending monetization of this One Billion Dollar collateral transfer transaction represents the solution to the Company’s hypergrowth expectations, and this transaction will allow the Company to proceed with its international growth objectives. We expect our ability to leverage this collateral will provide us with a self-sufficient capital platform ensuring opportunistic and strategic advantage.”