[Editor’s note: “The 7 Best Penny Stocks to Buy” was previously published in October 2019. It has since been updated to include the most relevant information available.]
Penny stocks are often dangerous stocks to buy for individual investors. Generally described as stocks with a price under $5, the group usually consists of quite a few fallen angels and growth stocks that haven’t reached — and may never reach — their potential.
But there are good penny stocks to buy. During the financial crisis, several stocks hit penny stock status and then rebounded tremendously. Pier 1 Imports (NYSE:PIR) went from 13 cents to over $20 before a long decline the past few years. Dollar Thrifty Automotive bottomed at 60 cents, and sold itself in 2013 to Hertz (NYSE:HTZ) for $87.50 a share.
Penny stocks are more difficult to find in a market near all-time highs, but they’re still out there. Here are seven penny stocks to buy that could provide solid returns for investors going forward.
Chesapeake Energy (CHK)
I’ve had an on-again, off-again attraction to Chesapeake Energy (NYSE:CHK) over the past couple of years. There’s long been an intriguing bull case on paper, as I noted in 2017. There’s also been a consistent inability to actually execute on that case, as I noted earlier this year.
Chesapeake is still trying to recover from the oil and gas bust that left it with nearly $10 billion in debt and much lower revenues. To say the least, progress has been choppy, both for the business and the stock. CHK stock is now trading at about 60 cents after blowing through a a 20-year low this fall.
That 20-year low isn’t a case of the market not paying attention. Chesapeake simply isn’t getting it done. Debt remains a key concern, particularly if oil and gas prices start falling again. The acquisition of WildHorse Resources earlier this year was supposed to help the balance sheet, given the heavy amount of CHK stock used to fund the purchase.
But initial optimism behind the deal has faded quickly, and debt is a key reason why. As of the second quarter, Chesapeake still had over $10 billion in debt on the balance sheet — the same as it did several years ago. Roughly $600 million comes due in 2020 and 2021, but free cash flow over the last four quarters remains negative.
That said, the paper case still holds. Chesapeake is much more an oil play than a gas play at this point. Thus, a continuation of oil’s move higher should disproportionately benefit CHK stock relative to a major like Exxon Mobil (NYSE:XOM). CHK stock has made some big moves including a nearly 100% pop between December and April. Bankruptcy is a mid-term risk, but CHK should be able to hold up in the meantime.
In short, CHK now looks like a classic penny stock. It’s high risk and high reward. But at the lows, it’s possible there’s at least one more bounce ahead — and huge long-term upside if the company finally can deliver on its promises.
Plug Power (PLUG)
The core problem with CHK stock is that the bull case requires that “this time is different.” As the old saw goes, those are the four most dangerous words in investing. Yet Plug Power (NASDAQ:PLUG) shows what happens when the market believes this time might actually be different.
PLUG stock now has gained more than 180% from December lows. And yet, there could be more upside ahead if management is right, as I wrote last month.
The difference between the two stocks, and a key reason why PLUG has soared, is that Plug Power is hitting its targets. The company finally reached a positive adjusted EBITDA, even if it stunningly took two decades to do so. Deals with Walmart (NYSE:WMT) in 2014 and with Amazon (NASDAQ:AMZN) in 2017 have added major clients to the list and helped drive recent improvements.
So there’s real confidence that Plug Power finally has a sustainable growth plan. To be sure, there are still skeptics. As I detailed last month, a recently released five-year plan suggests PLUG stock could triple if its targets are met. The fact that PLUG still sits below $4 shows the market doesn’t entirely trust the company just yet. And so the path to upside is clear: Plug Power simply needs to convert the skeptics.
DHX Media (DHXM)
The risks to DHX Media (NASDAQ:DHXM) are legion. The chart on a multi-year basis is a classic falling knife. Here, too, debt is a concern.
The company closed its fiscal 2019 (ending June 30) with a debt-to-EBITDA multiple of nearly 6x. That’s clearly in dangerous territory. That’s particularly true given that adjusted EBITDA declined last year, even ignoring the loss of profits that came from selling a majority stake in its Peanuts intellectual property to Sony (NYSE:SNE).
That said, DHXM stock has managed to stabilize in recent months. Fourth-quarter results were much stronger. A cost-cutting effort should save roughly $10 million annually and debt has been more than halved in recent years.
The existing IP portfolio of Teletubbies, Inspector Gadget, Yo Gabba Gabba! and YouTube content provider WildBrain could be of interest as the streaming wars intensify in the coming months.
This is a high-risk play, as the long decline in its chart shows. The bear case for DHXM is that its model — a debt-backed portfolio of decent, but not spectacular content — looks a lot like that of Iconix Brand Group (NASDAQ:ICON). Iconix sold Peanuts to DHX in the first place, aiming to reduce its debt. It provided little help: ICON has dropped over 99% in a five-year span. But DHXM might be in a position to rally. Investors need to understand, however, that significant risks remain.
Full House Resorts (FLL)
To be honest, I’m not sold on micro-cap casino operator Full House Resorts (NASDAQ:FLL). Like so many stocks on this list, there’s an intriguing case on paper — colored by management questions.
But the paper case does work. The company’s flagship Silver Slipper property in Mississippi could be sold and leased back to raise cash to pay down debt. An expansion in Colorado offers a growth driver beyond that. Sports betting already has boosted results in Mississippi and could do the same elsewhere in the portfolio.
The problem is that Full House has disappointed in terms of profitability targets. Both earnings growth and debt reduction have been minimal.
That’s changed in recent weeks, however. Full House has added more than 100 percent this year and could be the next casino operator to be acquired by a larger company. Its Q3 results show continued growth and a couple of acquisitions of its own that investors believe can power the company forward.
Noodles & Company (NDLS)
Fallen “fast casual” dining operator Noodles & Company (NASDAQ:NDLS) seems like an odd choice at the moment. NDLS stock has collapsed from post-IPO prices near $50 and actually trades a little above $5.
Pressure has continued of late, with NDLS down 40% from early July levels, and touching a 22-month low before slinking back over the $5 mark.
But there is some good news here. The launch of cauliflower and zucchini pastas might be a competitive edge for the company. Earnings earlier this year, after both the fourth quarter and the first quarter, looked solid. Noodles & Company has returned to profitability, and trades at a reasonable 21 times forward earnings with new store growth likely on the way.
Competition obviously is a factor, and the chart here still looks ugly. But penny stocks don’t come without risk. As a new entrant to the category, NDLS looks like one of the more interesting potential stocks to buy.
Dover Motorsports (DVD)
The case for Dover Motorsports (NYSE:DVD) is reasonably simple at this point. The operator of the Dover International Speedway in Delaware can likely support its price, currently just under $2, based on assets on the balance sheet. Meanwhile, a sale of the track would suggest nice upside from current levels.
The balance sheet here is quite strong. Dover closed its second quarter with $9 million in cash and no debt. Acreage in Tennessee, at the company’s closed Nashville Superspeedway, likely is worth over $20 million. Combined, those assets alone support half of Dover’s market capitalization of $70 million.
The Dover asset has real value as a track. NASCAR’s TV deal doesn’t expire until 2025, and includes increasing media rights revenue, a portion of which trickle down to operators like Dover. The downside here isn’t quite zero — but it’s certainly protected.
Meanwhile, the single-track operator seems a logical candidate for acquisition by either Speedway Motorsports or International Speedway (NASDAQ:ISCA). Speedway just went private, and ISCA is doing the same, so investors need to be patient as those processes play out. But Dover’s 5.41% dividend yield provides cash in the meantime.
The worry is that the logic of an acquisition has held for over a decade now, and DVD shares have kept drifting downward. But with sister company Dover Downs Gaming & Entertainment now sold to Twin Rivers Worldwide Holdings (NYSE:TRWH), it might be time for Dover to become the next racetrack operator to leave the public markets.
Denison Mines (DNN)
I’m not a fan of mining stocks, as I’ve written in the past. But if investors want to take a stab at the sector, then small, developing miners traditionally offer the best chances for big gains. And Denison Mines (NYSE:DNN) fits that bill.
Denison’s properties are located in the Athabasca Basin in northern Canada (Alberta and Saskatchewan). It’s targeting uranium resources at its properties — and uranium prices have stabilized of late after declines in 2015-2016.
The closure of a mine by giant Cameco (NYSE:CCJ) last year still presents a catalyst to those prices and the discounted fair value of Denison’s mines.
Obviously, there is a ton of risk here. DNN, at a current price of 48 cents, truly is a penny stock. Uranium miners had hoped for help from President Donald Trump’s administration that never arrived. Denison is unprofitable and likely will need to raise more capital down the line.
But DNN actually could provide what mining stocks are supposed to: leverage to the price of uranium. With fundamentals perhaps supporting some upside in the metal, DNN could follow.
As of this writing, Vince Martin has no positions in any securities mentioned.