Let’s face it. Penny stocks are risky. Many of these opaque companies teeter on the edge of bankruptcy. Some don’t even report financial figures.
But penny stocks are also a world of hidden opportunities. $10,000 invested in the top 5 penny stocks of 2021 would have turned into nearly $500,000 within a year. And at least 28 over-the-counter (OTC) companies trade with a negative enterprise value — a rare situation where a company becomes so cheap that its outstanding debt and stock become worth less than its cash on hand.
These mispricings all come down to one word:
Competition.
Most penny stocks have virtually zero Wall Street coverage. Instead, share prices are largely determined by day traders and punters ignoring an asset’s fundamental value.
And that creates opportunity.
Picking the Right Table
If you want to play against the Wall Street elite, I won’t stop you. For some, it’s exciting to go head-to-head against some of the biggest traders in the world by buying mega-cap stocks like Apple (NASDAQ:AAPL) and Facebook (NASDAQ:FB).
But if you’re investing for long-term gains, playing against sharks is a waste of time. Many of these Wall Street firms have virtually unlimited resources to study these stocks. Some even have back-door access to private information.
Instead, you want to do what professional poker players call picking the right table.
Here’s how it works:
When professional poker players enter a casino floor, they will often scan the room before choosing a table.
Sometimes, it’s simple. Drunken bachelor (or bachelorette) parties often signal weaker players. Other times, you must think more strategically — some players do well against overly aggressive competitors, while others prefer people they can bluff.
Once you understand the “picking the right table” concept, you’ll find the concept everywhere. College students will often pick several “easy-A” courses to help their GPA. Golfers will bet $100 per round against their friends but avoid making the same wager against the pro golfer in the group behind them. Retirees will move to a lower cost-of-living city.
We all find ways to stack the odds in our favor.
So why not do that for our investments too?
But What About Protection?
Skeptics, of course, will immediately note that penny stocks are only cheap because of the number of outstanding shares. Management can easily drop a $100 share price to $1 in a 1-for-100 share split. Failing companies can reverse-split their stock for the opposite effect.
Let’s also not forget that the average sub-$1 stock has volatility 9.5 times greater than stocks in the triple digits. Around a third of all bankrupt companies leave investors with nothing.
But this is the real world — a place that often flies in the face of conventional wisdom.
Many penny stocks are safer than they appear. Not only are there 28 companies with negative enterprise value. Another 250 also have market capitalizations that are less than their cash on hand — a hallmark of conservative investments with limited downside.
As a group, penny stocks are also countercyclical. In the first four months of 2022, 41% of OTC stocks gained ground as broader stock markets went into bear markets. Less than a third of Nasdaq stocks would do the same.
The Best Penny Stocks for 2022
That’s what makes some penny stocks such winning investments. A lack of Wall Street attention and inefficient markets means that investors can bet on big winners for cheap.
To invest in these stocks, I’ve divided my top picks into several big themes that will stand the test of time.
Big Theme No 1. Biotech
Biotech companies have an odd Protection feature. Much like oil companies and gold miners, these healthcare startups also sit on hard assets:
Their drugs in clinical trials.
These are assets with immediate transactional value. Managements can always sell these candidates in development, creating a “floor” on stock prices during market drawdowns.
History speaks for itself.
During the 2008 financial crisis, the iShares Biotechnology Index dropped by less than half of the S&P 500’s fall. Biotech would eventually emerge from the financial crisis up 29% vs. the paltry 1.5% growth of the broader index.
The same thing happened during the 2020 Covid-19 pandemic:
No matter how you look at it, a well-diversified collection of promising biotech picks offers a shot at supernormal gains while also ensuring strong downside protection.
Longeveron (LGVN)
When I first recommended Longeveron (NASDAQ:LGVN) in November, shares were trading under $4. The firm had recently seen a heavy spate of insider buying, suggesting something was brewing with its leading drug candidate, Lomecel-B.
“LGVN executives are acting as if they know something that we don’t,” I wrote in my letter.
Within a month, Longeveron’s management revealed that the Food and Drug Administration had granted Lomecel-B Orphan Drug Designation (ODD) for the treatment of rare heart defects in infants. Shares would eventually skyrocket to $45 after Reddit investors cozied up to the stock.
Now that shares have receded to a reasonable $10, it’s time for investors to buy back in.
That’s because there’s mounting evidence that Lomecel-B could also help slow the onset of Alzheimer’s disease.
In March 2022, the firm released results of its Phase 1 study of Lomecel-B. Not only was the treatment well-tolerated, but the drug also showed promising signs of reversing some physiological symptoms of Alzheimer’s disease. Phase 2 trials are now ongoing.
There’s still reason to remain cautious. Slowing the onset of a disease isn’t the same as curing it. And Phase 1 results always need to be taken with a grain of salt; sample sizes tend to be small and it’s easy to cherry-pick results.
But LGVN’s sub-$10 price makes it a relatively cheap bet on the future of a promising drug candidate. Investors should consider buying in.
Tracon (TCON)
Biotech investing also involves making solid valuation calls.
And that’s where Tracon (NASDAQ:TCON) comes in.
TCON started life as a promising small-molecule oncology drug company in the 2000s. Shares eventually peaked at a split-adjusted $175 in 2016 before losing 99% of their value over the intervening years.
Currently trading around $2.50 with a promising new drug in its pipeline, Tracon is now worth a second look.
The company’s near-term future rests on a single drug, Envafolimab, an immunotherapy treatment that received approval from China’s version of the FDA last November. And the chances of success are surprisingly high.
Other drugmakers have already used similar PD-L1 inhibitors to create working cancer drugs: the FDA approved use of AstraZeneca’s (NASDAQ:AZN) durvalumab in 2018, and Roche’s (OTCMKTS:RHHBY) atezolizumab in 2021. Tracon’s subcutaneous PD-L1 antibody treatment could add a similar weapon to the medical arsenal.
With TCON valued at $50 million, this is a gamble that’s beginning to look worthwhile.
Entera Bio (ENTX)
In January, the FDA granted Entera Bio’s (NASDAQ:ENTX) osteoporosis drug candidate a fast track to approval. The drug — EB613 — now needs only to pass a 12-month study on bone density rather than undergoing a longer-term fracture study.
That’s great news for Entera Bio. Historically, fast-tracked drugs have been approved at far higher rates compared to candidates undergoing traditional clinical trials. Efficacy expectations tend to be lower, and management teams tend to self-select drugs for the program.
Since then, ENTX shares have risen 20% on positive news of a separate Phase 2 trial.
Fortunately, there’s still time to buy. Markets value ENTX at under $100 million, an unusually low figure for a company working on a fast-tracked drug. And current prices for osteoporosis drugs such as Prolia currently hover at nearly $3,000 per year due to the disease’s high cost on society.
EB613 may yet fail in its final trials. But the potential upside from a successful outcome outweighs the risk of total loss.
Cerus (CERS)
For those looking for a “safer” alternative to development-stage biotechs, Cerus (NASDAQ:CERS) offers a potential win. This firm makes the only FDA-approved device for pathogen reduction in blood transfusion.
Shares took a tumble in 2020 when the National Institute of Health (NIH) suspended all Covid-19 tests of convalescent plasma.
But don’t be fooled by short-term troubles — Cerus is a steadily growing company. Product revenue in 2022 jumped 40% from the prior year, driven by platelet demand. In May, the Centers for Medicare and Medicaid Services published new guidelines for 2022 that could potentially increase reimbursements for Cerus’ core product, paving the way for profitability as soon as 2025.
Cerus is also one of the highest-rated biotech firms on Wall Street. Of the five analysts who cover the company, three have issued a “strong-buy” rating while the other two have “buy.” The average target price sits at $9.10.
But investors remain hesitant, largely due to an overhang from the loss of its Covid-19 business. Shares trade under $5, making Cerus one of the cheaper small-cap biotech firms that already has an in-market product.
Harvard Bioscience (HBIO)
Finally, there’s Harvard Bioscience (NASDAQ:HBIO), a play to bet on the entire biotech industry.
That’s because HBIO doesn’t develop drugs themselves. Instead, they build the complex machinery needed by biotech research labs. In other words, they’re making mining picks and Levi jeans for eager gold prospectors.
Many of these products are easily understandable. One of HBIO’s products helps researchers measure DNA samples down to the microliter. Another, known as the Buxco Accumulated Inhaled Aerosol system, can spray a fine mist of particles to mimic the spread of coronaviruses and other pathogens through the air. Other products are more complicated, involving electrophysiology and electrochemistry. These are tools biotech research will need for decades to come.
HBIO, however, isn’t without its problems. Many of the company’s top products are 25-year-old models, and its marketing department isn’t particularly effective on an ROI (return on investment) basis. The firm’s profitability has consequently sagged since 2015.
Yet as firms like Zomedica (NYSEAMERICAN:ZOM) have shown, it only takes one hit product for a firm like HBIO to regain footing. Meanwhile, private equity or a more prominent biotech firm might even acquire HBIO for its intellectual property. That could easily send HBIO shares into the double digits.
Maybe none of this happens, of course. Biotech investing is still risky at best. But for those looking to avoid risking it all on a specific drug undergoing clinical trials, Harvard Bioscience is a relatively safer penny stock to play the biotech boom.
Big Theme No 2. Energy and Commodities
Today’s “everything shortage” has been years in the making. The Baker Hughes Rig Count still sits far below 1,000 wells, AKA far below half of its 2015 peak. Mining firms have seen a similar downshift in capital investment.
Firms are now belatedly ramping production back up. Russia’s war on Ukraine has reminded American politicians that national security also involves securing supply chains. And a new period of massive deglobalization is sending shares of North American energy and commodity firms higher.
Martin Midstream Partners (MMLP)
Highly-leveraged Martin Midstream Partners (NASDAQ:MMLP) is one of my favorite types of penny stock investments: the kind with overlooked assets selling at a significant discount.
The company operates a billion-dollar network of oil storage, transportation and processing facilities. Meanwhile a historical overhang from the 2015 energy crash has long depressed asset prices.
Russia’s war in Ukraine has changed everything.
Today, energy has become an issue of national security. American and Canadian oil assets are now seen as an essential tool against Russian “pipeline diplomacy,” and the U.S. Energy Information Agency (EIA) now projects American oil production to continue rising through 2028.
That’s creating a windfall for companies like Martin Midstream that own these assets. Not only are pipelines and refineries having to handle more hydrocarbons flowing through the system. They’re getting an additional boost from the ethane, propane, butane and other byproducts of the refining processes.
And that’s why Martin Midstream’s aging assets could start to shine.
The firm operates a 2.1 million-barrel storage facility for butane and propane — fuels that must be stored during the summer production months and mixed with gasoline for the winter. This business has already earned MMLP $12.2 million in operating income for the firm in Q4 2021. More gains could be on the way next year as inventories start to rebuild over the summer.
Martin Midstream’s benefits also extend beyond gas byproducts.
In its sulfur segment, adjusted EBITDA has already risen 56% in Q4 2021, driven by rising fertilizer prices. Meanwhile, the tight supply of truck transportation has spilled over into marine transportation as well: the company’s full-year 2021 adjusted EBITDA came in at $114.5 million, a 20% improvement over the prior year.
Rarely in any diversified business does everything go right all at once.
The cumulative windfall has allowed MMLP to eliminate some of its most expensive debt, creating a magnifying effect on its share price. Yields on its 2025 bonds have fallen from a junk bond level 15% in 2020 to an investment-grade 4% today. As the company’s default risk falls to near-zero, equity investors are the first in line to reap any additional benefit.
Today, the firm still trades under 7x EV/EBITDA, a significant discount to the “average” midstream valuation of 10.5x EV/EBITDA. A return to more normal valuations would price the firm at almost $15 per share, a 200% upside.
There are some downsides worth knowing. Despite the steady deleveraging, MMLP still has relatively strict financial covenants. A sudden decline in oil production will have devastating knock-on effects on its solvency. And topline growth remains limited by the realities of a midstream firm.
Still, the recent spike in oil prices and refining demand is providing an opportunity for MMLP to succeed.
Team Inc (TISI)
At first glance, the Texas-based staffing firm looks more like a cyclical play on employment than a long-term investment in national security.
But look deeper, and it’s clear that Team Inc (NYSE:TISI) could be a big winner of the onshore energy revival.
Team Inc is a critical player for pipeline and energy storage inspection. Any firm building a new oil well needs to hire Team Inc or one of its competitors to pass environmental standards. And even areas not governed by the EPA — from water pipelines to manufacturers — still require consistent monitoring.
That means America’s newfound focus on national security is driving unprecedented demand for Team Inc’s services.
On the energy side, Team Inc is seeing a renaissance in its refining and pipeline business. The U.S. Energy Information Administration (EIA) now forecasts 2024 U.S. production will reach almost 13 million barrels per day — 30% higher than in 2020.
Tightening emissions-related standards are likewise driving demand for safety inspections. 425,000 miles of additional pipelines will soon be subject to federal safety standards this year thanks to an overhaul in Department of Transportation (DoT) rules.
Meanwhile, Team’s other work in manufacturing, aerospace and chemicals is seeing a similar boom as American businesses reinvest in domestic production capacity.
“We anticipate a strong outlook for our products and services over the next several years,” Team Inc CEO Amerino Gatti said in his Q4 2021 earnings call. “Over the last two years, we have seen a significant number of projects get pushed or delayed…. This is a trend that is not sustainable and is creating a backlog of capital projects and unscheduled shutdowns due to equipment failures.”
As American companies continue to ramp up capital investment, Team Inc’s bottom line will continue to grow.
Arianne Phosphate (DRRSF)
When former InvestorPlace analyst Joanna Makris introduced Arianne Phosphate (OTCMKTS:DRRSF), her pick might have confused some readers. Why would a star Wall Street tech analyst talk about a penny stock that digs up dirt as its business?
That’s because the Canadian-based phosphate miner does a lot more than just making fertilizer:
It’s also an electric vehicle play.
The firm’s high-purity mines generate a consistent source of supply for lithium iron phosphate (LFP) batteries, the technology favored by Tesla (NASDAQ:TSLA), Volksagen (OTCMKTS:VWAGY) and Ford (NYSE:F). Before the Russo-Ukrainian war began, analysts believed that LFP demand would almost double by 2030, fueled in part by Tesla’s promise to switch entirely to LFP batteries. Oil’s sudden rise has shifted everything forward, excellent news for DRRSF stockholders.
But Arianne is also a beneficiary from the broader agricultural boom. Wheat typically requires 50% more phosphate than soybeans, according to researchers from Penn State. And the agricultural shortages caused by Russia’s war in Ukraine have spilled into the market for fertilizers as well. Prices for fertilizing urea and potash in Brazil — one of the world’s largest agricultural exporters — have already tripled in the past year. American and Canadian prices might not be far behind.
That’s giving an additional boost to Arianne’s Canadian-based phosphate exploration projects. With world fertilizer supplies tightening by the day, Arianne’s low share price won’t stay low for much longer.
Allegiant Gold (AUXXF)
When I first recommended Allegiant Gold (OTCMKTS:AUXXF) in February, its CEO had just bought another 15,650 CAD worth of shares.
“Allegiant Gold already has a heavy insider presence. Seeing its CEO double down on his bet suggests that there’s even more gold in them hills,” I wrote.
The following month, the firm announced a 4 million CAD investment by Kinross Gold (NYSE:KGC). Since then, AUXXF shares have nearly doubled.
Rising inflation rates now offer investors a second chance to jump in. According to a study by Reuters, gold prices are second only to 10-year inflation-protected bonds when it comes to outrunning inflation. And gold exploration firms like Allegiant Gold tend to have some downside protection thanks to the potential of further discoveries in mines they own.
Smaller gold exploration firms also have higher upside potential than larger producing firms. Exploration makes up a larger portion of their business, and any major find could send shares surging upward.
Insiders have already taken note. The firm’s CFO and a director have joined CEO Peter Gianulis in adding to their stakes.
If history is any guide, they’re signaling there’s still more gold yet in them hills.
Benson Hill (BHIL)
Finally, the commodities supercycle will also benefit some riskier startups.
And that’s where agriculture Moonshot Benson Hill (NYSE:BHIL) comes in.
Benson Hill is a self-proclaimed “agri-food innovator” that commercializes high-protein soy products. In other words, it turns plant protein into human food and animal feed. The firm also has a smaller segment that grows and packs fresh produce.
In ordinary times, I would group Benson Hill with the hundreds of other zero-profit startups that may or may not survive (BHIL has yet to turn a consistent profit). But rising commodity prices have propelled the startup’s prospects into overdrive.
“Two crops dominate U.S. farming: corn and soybeans,” explain analysts at Bloomberg News. “The former requires massive amounts of fertilizer. The latter requires very little.”
Russia’s invasion of Ukraine has turned soy into agricultural gold. According to the same researchers, U.S. farmers plan to “dedicate about 2 million more acres this year to soy… and about 2 million fewer to corn.”
Benson Hill will benefit. The company now expects a 190% growth rate in its soy-based business in 2022 to compound its 206% growth last year. And though the firm won’t achieve profitability until at least 2024, its 2022 windfall will have lasting effects on its long-term viability.
Big Theme No 3. Deep Value
Penny stocks are also a hotbed of companies selling at deep value. These firms might not have the greatest growth prospects, but the potential for re-rating gives them a 2x to 5x upside all the same.
Party City (PRTY)
I’ll be the first to admit it: when Party City (NYSE:PRTY) went public in 2015, I wasn’t convinced it was a good bet.
At the time, the company’s $17 share price implied an enterprise value of $4.1 billion — a heady value for a brick-and-mortar retailer when 85% of its products are available from competitors online.
But in recent months, Party City has managed to thrive. And its sub-$5 share price also looks tempting.
In early 2022, the firm announced that same-store sales for the prior year had jumped 34%, erasing more than half of the company’s pandemic-related decline. Gross profit also increased a stunning 4.8% — driven mainly by the divestiture of its low-margin international operations.
More gains could be on the way. Wall Street analysts now expect the company to bring in more than 80 cents earnings per share in 2022, a 21% improvement over 2021. Bondholders have been similarly excited. In February, Fitch upgraded PRTY’s credit rating from CCC to B-.
But the best part? PRTY stock is cheap. Shares are priced at 4.4x price-to-forward-earnings, placing it in the same league as homebuilder D.R. Horton (NYSE:DHI) and dry bulk shipper Genco Shipping (NYSE:GNK); the latter boasts a sizable 12% dividend yield.
Cautious investors, however, will be quick to note Party City’s woes. Much like other private-equity spinoffs, PRTY is loaded with interest payments like a resident out of med school (the company’s accountants probably have about the same amount of cheer). And things could get worse for the company. As rates rise, Party City may find fewer reasonable options for refinancing its bonds due in 2026.
But equity investors should temper their worries. Fitch’s B- rating implies only a 10% probability of default, while current share prices reflect odds closer to 40%. If you can afford to make a risky bet, Party City’s shares make for a tantalizing proposition.
Treecon (TCOR)
Investors looking for a higher risk/reward potential might also consider Treecon Resources (OTCMKTS:TCOR), an over-the-counter firm specializing in lumber, timberland real estate and oilfields.
As an over-the-counter company, Treecon doesn’t provide audited financial statements. No third party reviews their numbers for accuracy or whether their businesses exist as advertised.
But for those willing to take a leap of faith (and risk their money if things go south), Treecon is a deep value play to watch.
The company owns and manages a small real estate portfolio of timberlands in Texas and Louisiana. It’s a slow-growing business, but provides an element of downside protection.
Meanwhile, the firm’s logging, heavy equipment and lumber treatment operations offer faster growth. In 2021, the company saw a 10% increase in revenue and earned 24 cents per share. Its present valuation prices the stock at under 3x price-to-earnings, making it one of the cheapest stocks on the market by that metric.
There are some significant drawbacks to Treecon. A sawmill fire in September 2021 will reduce timber production through 2023 while adding $20 million in debt. And the company’s opaque accounting looks unlikely to change, offering clouded visibility into daily operations.
But for those looking for diversification into timber, Treecon is a play to watch.
Big Theme No 4. Cannabis and Other Under-the-Radar Stocks
The high standards set by the NYSE and Nasdaq exchanges are often a double-edged sword. On the one hand, strict reporting requirements leave fewer opportunities for fraudsters to fleece investors. Financial scandals like Enron and Worldcom are actually quite rare on these exchanges.
On the other hand, the same rules ban many high-potential companies from listing. Legal cannabis firms operating in the U.S. still cannot list on the NYSE or Nasdaq, as marijuana remains a Schedule I substance under federal laws. And smaller foreign startups often have trouble raising the money required for an expensive American listing.
Instead, these firms usually find themselves trading OTC or on foreign exchanges, where they’re often mistaken for scams or worse.
That provides investors with opportunities. Since so few of these companies are covered by Wall Street analysts, they become a hotbed for inefficient markets. And with that, comes potential alpha for quick-thinking retail investors.
POSaBIT (POSAF)
POSaBIT (OTCMKTS:POSAF) is a point-of-sale (POS) payments company that helps marijuana dispensaries manage finances. It’s the rare industry that’s both low-competition and high-margin.
And there’s a very special reason why POSaBIT is succeeding.
Regulation.
Not only do exchange rules prohibit U.S. cannabis firms from listing. Credit card giants Visa (NYES:V) and Mastercard (NYSE:MA) are locked out of the market, as well as lesser-known payments processors like $64-billion-dollar Fiserv (NASDAQ:FISV).
Meanwhile, patchy federal regulations have left a loophole for Canadian-listed firms to run free. Though interstate commerce is still illegal, these offbeat firms are largely free to operate within states that have legal marijuana.
That has created an unintended bonanza for Canadian-listed firms, including POSaBIT.
The Canadian-listed firm helps cannabis retailers manage their money. Its flagship POS offering acts as a cashless ATM at the point of sale, while its backend reporting system helps stores to manage finances. The firm also offers arms-length purchases for dispensaries looking for debit-to-the-penny.
These workarounds would be absurd for traditional POS vendors. Payment terminal operators — from Block (NYSE:SQ) to Fidelity Information (NYSE:FIS) — generally serve as a neutral financial bridge between a sellers’ and buyers’ banks.
But in the quasi-legal world of cannabis retail, nothing is so simple. Cannabis dispensaries can’t open accounts at banks that operate across state lines nor accept credit cards — services most retailers take for granted. Most dispensaries end up dealing entirely in cash and utilizing local credit unions to store their spare change.
That’s given POSaBIT plenty of room to grow. Processed payment volumes grew 232% to $87.3 million in Q2, while gross profits ballooned 350%. When you have a one-of-a-kind solution in an uncompetitive market, it’s hard not to make money.
There are several investment risks.
First, the company is still a startup. Its net revenues clock in at just $5 million per quarter, and the firm has had to pivot its business multiple times. POSaBIT’s early attempts at crypto payment systems proved to be a failure, and there’s no guarantee that its forays into credit card payments or microlending will yield results.
Second, there’s competition. Companies from Block to Crypto.com (CRO-USD) are quickly developing versions of blockchain-based payments that could skirt current cannabis regulations. POSaBIT won’t have the marijuana PoS market to itself forever.
Finally, federal laws can turn on a dime. Though a gridlocked Senate won’t likely pass federal legalization laws in 2022, a sudden shift among GOP leadership could quickly change that calculus. POSaBIT needs to grow large enough before that happens to make itself a takeover (rather than a take-out) candidate.
But occasionally, the market throws us a fat pitch. And when it does — much like its gift of POSaBIT — investors should be quick to recognize it as a top stock for gains.
CryoMass Technologies (CRYM)
CryoMass (OTCMKTS:CRYM) is an OTC-traded company with an intriguing proposition:
What if you could help marijuana farmers get more THC out of their crops?
And that’s exactly what they’re doing. Through a patented freeze-drying system, CryoMass helps farmers extract more psychoactive content out of their cannabis crop. And with the rising popularity of cannabis edibles and oils, extracting these substances is becoming more important — and more profitable — than ever.
Successful agricultural companies from Monsanto to Scotts Miracle-Gro (NYSE:SMG) have long recognized the importance of crop yields. For many farmers, producing 200 bushels of corn per acre versus 150 bushels could mean the difference between a bumper year and bankruptcy.
When it comes to downstream processing, those gains are often magnified further. Poor drying techniques destroy water-soluble terpenes in marijuana plants, turning them into B-grade products. And even well-processed plants will see a large portion of their valuable trichomes damaged by exposure to oxygen.
That’s where CryoMass steps in. By processing cannabis plants directly in the fields, their systems stabilize and collect fully intact trichomes at the moment of harvest.
There are, however, some short-term concerns. Cannabis stocks are a magnet for speculators. In March, cannabis ETF AdvisorShares Pure Cannabis (NYSEARCA:YOLO) prices rose 20% after the U.S. House indicated it would pass the Marijuana Opportunity Reinvestment and Expungement (MORE) Act. Shares crashed back down after investors realized the bill had zero chance in the Senate.
CryoMass is also still in the experimental stage. Commercial sales could take years to materialize if they ever do. And the company must eventually build a business model combining both equipment sales and long-term service contracts — a challenge that even blue-chip manufacturers can struggle with.
But longer-term investors might consider taking a gamble anyway. As the market for legal marijuana grows, so too will the processes that enable its expansion.
Lark Distilling (LRK)
Investors looking outside the U.S. should consider Lark Distilling (ASX:LRK), an Australian-based whisky company. Though little known outside Australia, Lark seems set to become a winner in the coming years.
In 2018, ASX-listed Australian Whiskey Holdings bought the prestigious, Tasmania-based distillery.
The changes were immediate. Within two years, the firm had replaced incumbent management, bringing ex-Fosters Group managing director of spirits Geoff Bainbridge on board as CEO. Under Mr. Bainbridge’s direction, Lark Distilling started to expand.
By 2020, the firm had raised $5 million in debt and $8.85 million in equity to help fund production growth. Today, the firm has 770,000 liters of whiskey under maturation, a 51% rise year over year.
That makes Lark Distilling an unusually safe bet in the penny stock world. The value of its whiskey under maturation alone is worth almost $110 million AUD, or 60% of its market capitalization.
The company also makes good whiskey — an important distinction for any company making spirits. After winning gold and silver medals at the International Wine and Spirits Competition (IWSC), the distillery was a top four finalist for the Worldwide Whiskey Producer of the Year award.
That makes predicting Lark’s revenues relatively simple. Highly rated whiskeys sell at a premium, so management’s $139 AUD-per-bottle price assumption seems quite reasonable.
Production volume is also highly predictable. Once whiskey goes into casks, distillers have a fairly good idea of how many bottles they can eventually make.
That means it’s a safe bet that Lark will generate $40 million AUD in revenues by 2025. The distiller’s $180 million AUD market cap looks like a bargain at those rates.
Vestas Wind Systems (VWDRY)
Danish-based wind turbine firm Vestas (OTCMKTS:VWDRY) has seen stiff competition since 2017. Returns on fixed assets plummeted from over 40% in 2016 to 4% due to a sagging order book and rising costs. MW installed dropped 19% in 2021; not exactly confidence inspiring.
Russia’s invasion of Ukraine changes the calculus entirely. Germany now plans on reaching 100% renewable energy by 2035, nearly two decades ahead of schedule. Even Poland, a traditionally coal-consuming country, announced plans in early March to cut approval times for wind projects by two-thirds. They now hope to double the share of renewables by 2040.
This is… ahem… a windfall for Vestas. Not only does the firm benefit as new capacity is installed, but its service business will also gain as more of its turbines are put to work. It’s a virtuous cycle where sales today will lead to greater profits tomorrow.
With governments worldwide rethinking their renewables strategy, Vestas looks set to return a 40% to 50% gain.
ASE Technology Holdings (ASX)
Finally, blue-chip companies occasionally find themselves among penny stocks when they issue too many shares. ASE Technology (NYSE:ASX) is one such name.
Taiwan-based ASE is the world’s largest producer in the outsourced semiconductor assembly and test [OSAT] market — the business of producing and testing chips for firms like TSMC. Unlike rival Amkor (NASDAQ:AMKR), ASE also offers EMS services, value-added manufacturing that follows the OSAT process. It’s a highly profitable business that generated $760 million in operating income for 2019. Analysts expect the firm to more than double that figure to $1.7 billion in 2021 as worldwide chip shortages drive up both price and demand.
ASE’s stock, however, has long struggled to keep up. Because the firm has 2.14 billion shares on the market, investors could have bought ASX for $3.40 last year. At under $8 today, shares are still a bargain.
That’s because it’s unlikely ASX will issue new shares in the foreseeable future. The company’s $2.5 billion cash from operations more than covers its $2.1 billion in capital expenditures — no small feat for a manufacturer undergoing significant expansions. Its $2 billion cash pile also provides a sufficiently large cushion.
From a business standpoint, ASE also looks like a long-term winner. Chips are a growing business, particularly in 5G networks which sometimes require thousands of smaller cell networks to cover dense areas.
It’s an area that ASE knows well. The firm already generates more than half its revenues from the communications sector. Its long-running partnerships with Qualcomm’s 5G chip had firms like Moody’s calling ASE the “market leader” in 5G chips.
As chip shortages continue to reverberate, ASE looks set to continue its string of success. Investors should hop on board and enjoy the good times while they last.
