Penny stocks, defined as stocks trading under $5 per share, are known for their volatility. Even small pieces of news or unconfirmed rumors can send some penny stocks swinging wildly up or down in price. This extreme sensitivity makes them risky but also creates opportunities for short-term traders.
Good News Can Lead to Spikes
Penny stocks are prone to extreme price spikes on positive news. Given their already low share prices, even modest influxes of buying interest can send prices surging exponentially higher in a short timeframe. News that signals improved financial performance, major business progress, or increased future growth prospects tends to disproportionately impact investor sentiment.
For example, events such as a biotech penny stock reporting promising results from a key drug trial, an industrial stock landing a large new customer, or a technology penny stock unveiling a game-changing proprietary product can ignite frenzied buying.
Traders closely monitor cheap stocks for these types of value-changing events to try and ride the upside. However, while some penny stocks deliver multi-fold returns within days post-news, the rallies often prove unsustainable. Prices soon peak, and heavy profit-taking selling kicks in from short-term traders, leading to equally rapid retracements. Managing risk via disciplined stop losses and resisting the urge to over-extend position sizes remains key.
Bad News Can Translate Into Sudden Crashes
While good news can catapult penny stocks higher, negative developments can, conversely, crash prices lower at lightning speed. Penalty selling sets in swiftly, causing dramatic single-day losses of 25-50% or more. Company setbacks like clinical failures for biotech stocks, losing major customers for service providers, supply chain issues for manufacturers, or new competitive threats can totally undermine the investment case.
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Once selling volumes pick up pace as investors head for the exits, downside momentum feeds on itself. Further compounding matters, penny stocks typically suffer from wider bid-ask spread costs and constrained liquidity unable to absorb such huge selling flows gracefully. Risk management remains exceedingly difficult, with minimal time to cut losses between material events and price collapse. Investors need robust contingency plans defined upfront to minimize hit severity.
Rumors Create Trading Frenzies
Even rumors without actual substance can ignite volatile price swings in penny stocks. Rumors around a possible buyout offer, new partnership, product launch, or positive trial data related to biotech penny stocks to watch can have an outsized impact. The problem is most rumors turn out false or exaggerated. Trading on rumors, hence, remains extremely risky.
Securities regulators often halt trading of specific low-priced stocks when rumors create potential market manipulation. Halting aims to give investors time to digest available information without panic selling or buying.
What Does It Mean For Penny Stock Investors?
It’s no secret that penny stocks carry enhanced news and rumor risk factors. Their ultra-low per share prices mean relatively small financial news can translate into gigantic percentage stock moves when compared to higher-priced stocks. Investors should hence use tight stop losses, avoid large position sizes, and confirm news or rumors through multiple credible sources before buying or selling. In this article, we look at a handful of stocks under $5 gaining attention after recent updates.
- Erasca Inc. (NASDAQ: ERAS)
- VerifyMe (NASDAQ: VRME)
- ChargePoint (NYSE: CHPT)
- Rocket Lab USA, Inc. (NASDAQ: RKLB)
Penny Stocks To Watch 1: Erasca Inc. (ERAS)
Erasca, Inc. is a clinical-stage precision oncology company. They focus on developing therapies for RAS/MAPK pathway-driven cancers and aims to comprehensively shut down this pathway for cancer treatment.
Earlier this quarter the company announced milestone news that has turned heads. This milestone was achieved in their naporafenib and ERAS-801 programs. Key achievements include aligning with health authorities for the Phase 3 SEACRAFT-2 trial of naporafenib in NRAS mutant melanoma. This is a significant step toward advancing this therapy. The company also reported identifying the maximum tolerated dose for ERAS-801 in glioblastoma, an important milestone in drug development.
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Furthermore, Erasca has refined its pipeline to concentrate on high-potential programs. This strategic shift involves deprioritizing certain trials, allowing for better allocation of resources. Importantly, these strategic decisions have extended the company’s cash runway to the first half of 2026. This extension provides financial stability and more time to achieve critical research and development goals.
While there weren’t any new headlines, management is clearly making waves, and rumors may be striking up some speculative momentum right now. This month Director Alexander Casding and CEO Jonathan Lim are at the center of attention. Lim purchased 1 million shares at an average price of $1.70. Meanwhile, Casdin picked up 30,000 shares at an average of roughly $1.66.
2. VerifyMe (VRME)
The company provides brand protection and logistics services. They specialize in anti-counterfeiting and supply chain traceability. It is one of the penny stocks to watch with news on Friday and shares have already reacted to the headlines.
VerifyMe announced a stock repurchase plan and board compensation changes. They approved up to $500,000 for stock buybacks, contingent on market conditions and legal considerations. The Board’s compensation is revised, with a 50% reduction in equity retainer and specific roles’ compensation after the 2024 shareholder meeting.
This news comes about a month after VerifyMe reported earnings. This announcement included a scheduled investor conference call and webcast on the same day. Nevertheless, the approved share buyback, though relatively small, has struck a chord in the stock market today. Whether it’s enough to prompt a rebound in shares in the long-term is something to be seen heading into the end of the year.
Penny Stocks To Watch 3: ChargePoint (CHPT)
This is one of the many electric vehicle (EV) charging companies providing a network of comprehensive EV charging solutions. Earnings have prompted momentum in CHPT stock this week. Thanks to the news, shares are steadily back on the way up.
ChargePoint reported its third quarter fiscal year 2024 financial results. The report highlighted a 12% decrease in year-over-year revenue, totaling $110 million. This decrease was primarily due to a significant inventory impairment charge. The report also noted a negative GAAP gross margin of 22%.
Operating expenses increased, reflecting the company’s cost-saving measures. Despite these challenges, ChargePoint reaffirmed its commitment to achieving positive non-GAAP Adjusted EBITDA by the fourth quarter of 2024.
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Rick Wilmer, the new President and CEO of ChargePoint explained, “Though the quarter overall did not meet expectations, we did demonstrate how we continue to empower the entire EV ecosystem, across hardware and software, and we fortified our balance sheet, which leaves us well capitalized to execute on our strategy. We remain firmly committed to delivering positive non-GAAP adjusted EBITDA in the fourth quarter of calendar year 2024.”
4. Rocket Lab USA, Inc.
Space stocks are heating up and Rocket Lab is on the list. It provides launch services and space systems. They specialize in deploying satellites into orbit and recently inked a fresh deal. Rocket Lab USA, Inc. has signed a deal to launch an Earth observation satellite for the Korea Advanced Institute of Science and Technology (KAIST).
The satellite, NeonSat-1, will be the primary payload on a Rocket Lab Electron rideshare mission alongside NASA’s ACS3 satellite in the first half of 2024. This mission, launching from Rocket Lab Launch Complex 1 in New Zealand, marks another step in Rocket Lab’s growing launch services. NeonSat-1 is part of a future Earth observation constellation and demonstrates Rocket Lab’s integrated space systems strategy.
This news comes a few weeks after Rocket Lab announced establishing a new Space Structures Complex in Baltimore County, Maryland. This facility will focus on producing advanced composite products for both Rocket Lab’s internal projects and the broader space industry. It marks a strategic expansion of Rocket Lab’s manufacturing capabilities, particularly for their Neutron launch vehicle.
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