Before we get into a discussion about penny stocks to buy, let’s get this out of the way: Don’t buy penny stocks.
Most penny stocks — equities that go for less than a buck a share — trade on the over-the-counter market, where listing requirements and regulatory oversight is much more lax. Sure, most OTC stocks are on the up and up, but this is also the market where scammers go to run their pump and dump schemes.
In spite of this, penny stocks remain popular with a subset of investors because of their tremendous potential upside. Traders like the dramatic price swings, and investors like that it’s a lot easier for a stock to go from 50 cents to $5 than it is to go from $50 to $500.
We bring this up only because the crushing stock market slump is turning lots of major-market listed names into penny stocks. According to Finviz, there are currently 44 stocks on the New York Stock Exchange and 198 on Nasdaq that are trading below a dollar a share.
Yes, some could get delisted for not adhering to listing requirements. But there are also some stocks that could possibly, just maybe, have some serious upside.
If I haven’t communicated it to you clearly enough, penny stocks are dangerous. We’re talking Hail Mary throws, speculative plays — don’t go nuts. You must be prepared to lose your principal.
With those caveats, here are five penny stocks to buy if you’re willing to stomach the risk:
Penny Stocks to Buy: Gerdau SA (ADR) (GGB)
GGB Market Cap: $1.37 billion
GGB Stock Price: 95 cents
Gerdau SA (GGB), Brazil’s largest steelmaker by market value, is like Job these days. Brazil is in a depression, there’s a global glut of steel and Moody’s recently downgraded its credit rating.
Oh, and (cough), police raided the company Thursday and issued an arrest warrant for the CEO for alleged tax fraud and graft.
So why the hell should you mess around with GGB stock? You shouldn’t, but potential upside remains nonetheless.
Trading is thin, so even a hint of good news can send shares soaring. The balance sheet and cash picture aren’t terrible, either. GGB has more assets than liabilities and it generated $126 million in unlevered free cash flow last quarter.
Penny Stocks to Buy: Castle Brands Inc (ROX)
ROX Market Cap: $137 million
ROX Stock Price: 84 cents
Castle Brands Inc (ROX) has lost more than 30% for the year-to-date, which put it into penny stock territory. That doesn’t mean it’s preordained to stay there.
Castle Brands is in the booze business, with brands including as Jefferson’s Bourbon, Knappogue Castle Irish Whiskey and Gosling’s Rum, all of which get high marks from connoisseurs. So it’s got that going for it.
ROX believes Jefferson’s is the fastest growing premium small-batch bourbon in America. True, margins are a big problem — it has never reported a profit — but they are improving dramatically.
As a thinly traded nano-cap stock, shares make dramatic moves. Besides, not to start any rumors, but this is the booze business. Little guys get acquisition offers all the time.
Penny Stocks to Buy: Star Bulk Carriers Corp. (SBLK)
SBLK Market Cap: $126 million
SBLK Stock Price: 57 cents
Buying a shipping stock these days is kind of like taking out a mortgage on a house fire.
The blame lies with a global glut of iron ore and coal. (Thanks, China.) The rout in prices means dry bulk shippers can’t operate their ships at a profit — if they can even sail them at all.
Star Bulk Carriers Corp. (SBLK) is struggling like them all. It’s even sold vessels to bring in cash. Forced asset sales are about as big a red flag as you can get.
That said, SBLK is a buy because the industry is going to have to consolidate, and it has a shot at coming out on top in such a scenario. It’s controlled by Howard Marks’ Oaktree Capital hedge fund, and he’s kind of a genius.
Penny Stocks to Buy: StemCells Inc (STEM)
STEM Market Cap: $37 million
STEM Stock Price: 33 cents
In STEM’s case, all eyes are on 2017. That’s when investors will get an idea if StemCells’ concoction of human neural stem cells are effective in treating spinal cord injuries.
It’s a swing for the fence move. If trials show that STEM’s technology is even moderately effective, look out. Analysts say this is a blockbuster of a market.
The downside is that these sort of trials fail all the time. Hence, the reason why there are so many biotech penny stocks.
Penny Stocks to Buy: Aeropostale Inc (ARO)
ARO Market Cap: $15.41 million
ARO Stock Price: 19 cents
Aeropostale Inc (ARO) — a Rip Van Winkle cash-burning machine — is a buy if you want to try for a three-pointer from the cheap seats.
All mall-based teen retailers have been under increasing pressure for years. Mall traffic is down, fast fashion is up and Aero in particular has completely lost touch with its base. But in the spirit of the higher the risk, the higher the reward, ARO deserves a quick glance.
Whatever the opposite of the law of large numbers is, ARO has it. The market cap is so small it takes an electron microscope to see it. Plus, the NYSE gave it a stay of delisting execution.
If ARO’s cost-cutting efforts can keep it alive long enough to find the right fashion mix, it could survive, and then shares will rise like Lazarus.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.