Stocks have rebounded sharply since the March market crash. As a result, traders are looking for hot opportunities again. Tech stocks, growth companies, and speculative firms are all surging. Amid that backdrop, there may well be an uptick in interest in penny stocks soon as well. When the market is enjoying a strong upswing, oftentimes penny stocks enjoy an outsized benefit.
What makes for a good penny stock selection at this point? There are several features to look for. A company that has fallen too far on coronavirus concerns is one good category. Or look for companies that could benefit from the aftereffects of this economic shock; natural resource stocks could benefit, for example, if all the Federal Reserve stimulus ends up leading to inflation.
Here are seven penny stocks to have on your radar now:
- Ambev (NYSE:ABEV)
- Solitario Zinc (NYSEAMERICAN:XPL)
- Retailwinds (NYSE:RTW)
- Genesis Healthcare (NYSE:GEN)
- San Juan Basin Royalty Trust (NYSE:SJT)
- Corporacion America Airports (NYSE:CAAP)
- Castlight Health (NYSE:CSLT)
The first on this list of promising penny stocks is Ambev. On a pure market capitalization basis, Brazilian brewing leader Ambev is not a typical penny stock. Even after the crash this year, Ambev is still worth tens of billions of dollars. But at $2 per share, ABEV stock certainly falls in the lower-priced shares category. And like other low-priced shares, there could be big upside; Ambev sold for $4 earlier this year, and $7 in 2018. Those would be large gains from the current two buck level.
Ambev, for those unfamiliar, is the South American arm of the Anheuser-Busch Inbev (NYSE:BUD) beer conglomerate. South America is in a steep recession right now. Economies such as Brazil and Chile, where Ambev operates, are seeing their economies tank as commodity prices plunge and export orders have dried up. With China in particular just starting to recover, the emerging markets that rely on China are in a downdraft.
Ambev is well-positioned to ride out the bust, however. It has a net cash position and the beer market has remained stable. For now, the company may bring in less revenue due to selling beer in weak currencies such as the Argentine Peso. However, as the virus starts to pass and economic activity picks up, solid companies like Ambev will start to catch traders’ attention again.
Solitario Zinc (XPL)
Solitario Zinc is a small minerals exploration company. It focuses on zinc in particular, along with other base metals. The thing that makes Solitario fascinating is its business model. It uses something of a prospect generator approach. It takes a stake in a variety of mineral prospects and then looks to help develop and farm them out.
Over the past five years, it has sold royalty streams off of properties and also sold assets directly. In this way, it leaves the development risk on these zinc and other mineral properties to third parties while capturing upside optionality.
Solitario is currently well-funded. As of last quarter, it had $8 million of cash and short-term investments. Against that, it has been burning less than $1 million per year in operating costs. This gives Solitario years to explore, develop, and find buyers or joint venture partners for its projects.
And the market may heat up for these sorts of asset plays. With the Federal Reserve pumping unprecedented levels of liquidity into the system and the federal government engaging in record deficit spending, there’s plenty of money sloshing around. At some point, this sort of inflow leads to higher commodity prices. The great gold and base minerals boom of 2002-08 followed massive Fed action to support the economy between 1998 and 2001, after all. History could repeat.
Retailwinds is a high risk, high reward play in the apparel sector. For obvious reasons, these stocks have been absolutely smashed thanks to the coronavirus. Retailwinds, as the owner of New York & Co and other clothing stores, has not escaped the problems. The plight facing retail in general and clothing stores in particular, is not new. Retailwinds is hardly the only company trading for pennies now.
So why focus on RTW stock in particular? Just look at the balance sheet. As of last quarter, the company had $61 million in cash-on-hand, no borrowings against its short-term lending facility, and no long-term debt. Thus, Retailwinds is selling for a market capitalization of just $25 million at a 40 cent share price but has twice that in cash. This gives the company a lot of breathing room.
There’s plenty that could go wrong, particularly with the coronavirus shutting down stores for the time being. But with that large cash cushion, speculators are getting an interesting set-up here. A 40 cent stock could easily run-up substantially if management shows any signs of being able to put a strong holiday 2020 season together. As recently as this past December, shares traded for $1.25. With a tiny company like this with a decent cash position, there’s a chance for a big upside surprise.
Genesis Healthcare (GEN)
Healthcare penny stocks? Yup. The coronavirus has had a surprisingly negative impact on the health care sector. You might intuitively think that a pandemic would cause more money and resources to flow into the health care system. And while that may be true, it hasn’t been distributed equally. In fact, many medical companies have taken a big hit.
Genesis Healthcare, for example, operates nursing homes, assisted living facilities, and other such medical centers for older people. Investors have shunned these sorts of health care stocks because of the Covid-19 liability risk. In theory, the companies that own and operate such facilities could be on the hook if they didn’t have sufficient safeguards in place to prevent the spread of the virus. As is the case when lawyers get involved, it’s hard to forecast where things will ultimately end up on this front.
That said, Genesis Healthcare stock is now priced for a dire ending. And that’s an abrupt reversal of fortune. From last fall through to this February, Genesis had shot up from $1 to $1.75 as it steadily gained strength. Now, though, it has dumped to just 62 cents. Unlike many Covid-affected stocks, Genesis is still trading near its recent lows.
As of last quarter, Genesis had more than $800 million of current assets, implying that it can withstand short-term liquidity concerns. Any signs of regulatory assistance or a government aid package for assisting living centers, and Genesis Healthcare could enjoy a strong recovery.
San Juan Basin Royalty Trust (SJT)
San Juan Basin Royalty Trust holds the rights to a portion of the revenue off certain oil and natural gas production fields in the state of New Mexico. Since 2017, the stock has gotten slammed as natural gas slumped. Making matters worse, the boom in Permian production growth in nearby West Texas saturated the local market. Shale producers flooded the area with excess natural gas, driving prices sharply lower. As a result, San Juan’s monthly dividend went from five cents or so per share down to a minuscule amount.
However, things are now set to improve. The collapse in oil prices is causing shale producers to sharply curtail production going forward. That, in turn, will cause natural gas production to start dropping off quickly by 2021.
San Juan is set to benefit when it does. Since it is a royalty trust, it has no employees, operational risks, debt, or other concerns that weigh down a normal company. It gets a piece of the pie from the production on its oil and gas fields, and that’s that. As prices rally, it will earn more royalties and thus pay a larger dividend. Unlike most oil and gas companies, San Juan doesn’t have bankruptcy risk, so it’s a much safer way to play the eventual recovery in natural gas prices.
Corporacion America Airports (CAAP)
Corporacion America Airports is an Argentina-based airport operator. It holds concessions for most of Argentina’s airports, including both Buenos Aires facilities. It also holds properties in Italy, Brazil, Ecuador, and other assorted countries. In total, it operates 52 airports. The company’s stock made its U.S. debut in 2018 at $16/share.
Unfortunately, it was soon hit by bad timing, as Argentina’s currency plunged and then a socialist government took control of the country last year. Just about everything that could go wrong has. Brazil’s economy has turned sharply lower. Italy and Ecuador — where CAAP has key concessions — are both among the hardest-hit countries from Covid-19. And, of course, air traffic has virtually disappeared for the time being.
That has all the makings of a massive turnaround stock, however. Shares are now down from $16 to $2. The company generated nearly $500 million per year in EBITDA in good times, and now has a market cap of less than $400 million. Throw in debt and it is selling for just 4x Enterprise Value to EBITDA — the standard valuation metric for airports.
Getting back to an 8x ratio — where the comparable Mexican airport operators trade now — would get CAAP stock into the double digits. And if the Argentine economy ever gets back on track, it could reclaim the initial public offering price from 2018.
Among penny stocks, there’s plenty of risk here. The company has debt and very little revenue is coming in right now. But if they can make it through the downturn with the share structure intact, this could be a multi-bagger on the way back up.
Castlight Health (CSLT)
The last stock on this list of penny stocks is Castlight. Health care software company Castlight Health has had a rough go of it in recent years. The company has lost a number of core customers, such as Walmart (NYSE:WMT), leading to substantial investor uncertainty. The CEO left and investors gave up on the stock, sending it below a buck per share.
The company has new management now and is focused on the turnaround. This most recent quarter, the company lost just one penny per share, beating expectations. On top of that, revenues surged 10% year-over-year, beating estimates. Keep that momentum up for a few quarters, and the stock should rally.
As with many penny stocks, there’s a lot of risk here. If Castlight Health keeps going down the same path that it was on up until 2019 under the old CEO, shareholders could be in for a bumpy ride. But there’s the ingredients of a decent investment here. Wall Street loves software and recurring revenues. With any signs of profitability or positive free cash flow, you’d expect the stock to sell for at least 2-3x revenues, which would result in a share price north of $2.50 compared to the current share price of 70 cents.
There’s also the possibility of someone acquiring the firm. A private equity firm, for example, could be an interested suitor for this sort of company. Now, you should be careful with making an investment thesis simply on takeover hopes. But in this case, the stock is clearly priced for a pessimistic future, so any sort of improvement with the new management team could brighten the picture here quickly.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he owned ABEV, CAAP, and SJT stock.