As a general rule, investors should avoid penny stocks. It’s easy to get tempted by what look like “cheap” prices (penny stocks traditionally are classified as those with a share price under $5), but most names in the group are extremely risky.
To be sure, there are exceptions. Indeed, I’ve recommended a few penny stocks in the past. Plug Power (NASDAQ:PLUG) has turned out to be a huge winner, and Noodles & Company (NASDAQ:NDLS) has fared reasonably well. Both have rallied out of the group. But Chesapeake Energy (OTCMKTS:CHKAQ), which I highlighted as the highest-risk and highest-reward play on the list, recently filed for bankruptcy.
Investors can find proverbial diamonds in the rough. Still, overall the group can be dangerous, because investors often make a key mistake.
That mistake is to believe that lower share prices make penny stocks “cheaper” than other names. In fact, in most cases, the low share prices are a direct result of big declines. Other times, the business never had much of a chance to begin with.
Meanwhile, with these low-priced stocks, traders or on occasion the companies themselves use questionable methods to execute so-called “pump and dump” schemes, a key reason why the category has a somewhat shady reputation.
As a result of those factors, investors need to be careful with any penny stock. Right now, they need to execute particular caution with these 10 names, all penny stocks with the potential for further downside:
- Denbury Resources (NYSE:DNR)
- GoPro (NASDAQ:GPRO)
- Himax Technologies (NASDAQ:HIMX)
- OPKO Health (NASDAQ:OPK)
- AMC Entertainment (NYSE:AMC)
- Hexo (NYSE:HEXO)
- LendingClub (NYSE:LC)
- Hertz Global Holdings (NYSE:HTZ)
- New Age Beverages (NASDAQ:NBEV)
- Party City Holdco (NYSE:PRTY)
Let’s take a look at what makes each among the key stocks to avoid now.
10 Penny Stocks to Avoid: Denbury Resources (DNR)
Denbury Resources is a literal penny stock, closing Tuesday at 24 cents. But even that figure seems too high.
After all, the most likely outcome for Denbury Resources is the same fate that befell Chesapeake, SandRidge Energy (NYSE:SD), and so many other oil and gas wildcatters: bankruptcy.
Denbury finished its first quarter with over $2.2 billion in debt. The company did manage to turn an adjusted profit in the quarter. But 6 cents per share — about $27 million in total — is not enough to tackle that debt load. With oil and gas prices falling further in the second quarter, Denbury’s profits likely will wither away as well.
There is a long-shot case here akin to that of CHK stock in 2018 and 2019. If oil and gas prices soar, and soar in a hurry, DNR stock can do the same. But that’s a bet with exceedingly thin odds, which more than offsets the potentially huge rewards.
As far as penny stocks go, GPRO hasn’t been a terrible choice. The stock is about flat to where it traded in the spring of 2018. It has more than doubled since March, albeit off an all-time low.
And by the standards of the group, this isn’t a terrible business, either. GoPro is the unquestioned leader in action cameras. It has generated over $1 billion in revenue in the last four quarters.
Meanwhile, last month, a shareholder wrote a letter to the GoPro board of directors, calling for a sale of the company. KORR Acquisitions estimated GoPro could get $15 per share, more than triple the current price.
It’s possible, certainly. I’ve long compared GoPro to Fitbit (NYSE:FIT), another tech hardware play whose growth has stalled out. Fitbit will be acquired by Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), assuming regulators agree to the deal. Another tech giant (and it only takes one) could see value in GoPro.
But there has simply been such a long history of disappointment that it’s hard to get too excited, even below $5. A sale might drive value, but chief executive officer Nicholas Woodman still controls the company through a dual-class share structure. If he doesn’t want to sell, he won’t. GoPro continues to struggle with consistent profitability. And the market simply may not be that big.
There are many more dangerous penny stocks out there than GPRO. But that’s not enough of a bull case.
Himax Technologies (HIMX)
Himax Technologies, too, isn’t necessarily a terrible company to own. The small-cap chipmaker has some exposure to trends like artificial intelligence and the Internet of Things. Based on Wall Street estimates, Himax should be profitable this year and next, if modestly so. The company even pre-announced solid second quarter results this week.
But there’s the same sense with HIMX as with GPRO: it has been a “next year” story that simply has never quite played out. Himax stock traded in the double-digits in the middle of the last decade based on its exposure to virtual reality hardware, sales of which disappointed. In 2013, Google acquired 6% of the company, and Himax became the sole supplier for Google Glass. That product, too, never got off the ground. (Himax does still supply chips for Android tablets.)
It’s simply difficult to see how this story changes. Semiconductor manufacturing is a difficult business. End markets for the most part aren’t growing much, if at all. HIMX might find a way to catch a bid again, but this seems like a case where the stock is cheap for plenty of good reasons.
OPKO Health (OPK)
OPKO Health stock has been one of the big winners of the past few months, with a 243% gain from late March lows. The rally makes some sense.
OPKO’s Bio-Reference Laboratories provides testing for the novel coronavirus. And the company has initiated a Phase 2 trial for its Rayaldee as a potential treatment for patients afflicted with the virus.
But the news isn’t quite as bullish as it appears. Rayaldee is a thyroid treatment, and OPKO itself has noted it’s trialing the drug only for “mild-to-moderate” cases of Covid-19. The testing business should drive some growth, but likely not enough to get OPKO finally into profitability. With a heavily leveraged balance sheet, that’s a concern.
OPK admittedly has been a battleground stock. Short sellers have gone after the stock for some time, and were emboldened when OPKO’s chief executive officer Dr. Philip Frost was accused by the Securities and Exchange Commission of participating in “lucrative market manipulation schemes.”
One OPK short has said the company’s pivot into coronavirus testing was a tactic designed for a short-term boost to the share price. Frost responded by noting that he has only added to his stake in the company. The battle seems likely to continue, but OPKO has a lot to prove before it can declare itself victorious.
AMC Entertainment (AMC)
AMC stock has faded back into penny stock territory after rallying to briefly touch $7 last month. But the cheaper price doesn’t make the stock attractive.
Obviously, the short-term impact of the pandemic on the movie theater operator is extreme. And “second wave” concerns have no doubt led to the reversal in AMC stock.
An investor might argue, however, that the market is too focused on the short term. After all, patrons will return to theaters at some point. In fact, AMC may well see an initial surge upon reopening owing to the sheer novelty of seeing a movie on a big screen, instead of in one’s living room. A debt refinancing drove optimism toward AMC stock in after-hours trading Tuesday.
But that case seems too thin. AMC was struggling long before the pandemic, as a bloated balance sheet and declining attendance pressured earnings. Meanwhile, even with AMC stock down 43% so far this year, shares aren’t necessarily cheaper.
AMC has had to add even more debt to fund recent losses; until the last few sessions, the market value of the business (including debt) actually was higher than it was before the pandemic arrived. That clearly shouldn’t be the case, which in turn means that AMC stock can, and probably should, keep sliding.
The cannabis space has no shortage of penny stocks after a long decline from last year’s highs. There are few that look potentially intriguing, but Hexo isn’t one of them.
Meanwhile, sales have disappointed, and Hexo remains unprofitable, even on an Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) basis.
There are simply too many options in the space to take a flyer on HEXO stock below $1.
There are not that many stocks in this market still trading near the lows, but LendingClub stock is one of them. It’s not hard to see why.
After all, LendingClub was struggling coming into 2020. The company had to execute a reverse split last year, and for the year posted adjusted net income of just 2 cents per share.
Now, the pandemic is leading to job losses across the country, likely impacting borrowers and pressuring lender demand.
Simply put, LendingClub simply has never proven that its business model actually works, even when the economy was roaring. It’s hard to see how the platform can perform better amid a time of unprecedented upheaval.
The steep, attention-grabbing rally in Hertz stock has faded. The company tried the unprecedented move of selling stock to raise capital after filing for bankruptcy, only to run into regulatory resistance. That was enough to end gains that at one point cleared 1,000% — but the fade would have happened anyway.
After all, Hertz stock is almost certainly worthless. Its debt exceeds the value of its assets, and the bankruptcy itself will erode some of that value. Barring a significant increase in used car prices — its Hertz’s fleet that backs the secured bonds on which the company defaulted — there’s going to be nothing left for common shareholders. Unsecured bondholders likely won’t be made whole.
Even with those facts, however, HTZ stock still is assigned value by the market. In fact, it has a market capitalization just shy of $200 million. For a company in bankruptcy, that seems like $200 million too much.
New Age Beverages (NBEV)
Over the years, NBEV stock has posted some huge rallies. New Age Beverages went from mere pennies in early 2016 to almost $6 the following year. After a dip below $2 in 2018, the stock moved to $7 early last year.
However, the stock has steadily declined since, and it’s possible there’s more downside ahead. I thought NBEV stock was a sell in December, and I still believe that’s the case. The opportunity in cannabidiol hasn’t played out. The acquisition of China’s Morinda disappointed out of the gate. And New Age remains significantly unprofitable: it lost nearly 20 cents for every dollar of revenue in the first quarter.
It’s possible New Age finds some traction again and sparks yet another rally. But at this point, it’s going to take a lot more than modest growth to regain investor confidence.
Party City (PRTY)
Just a couple of months ago, PRTY stock was priced for imminent bankruptcy. Shares spent most of April below 50 cents.
The stock has faded over the last month, however, dropping 28%. I’d expect the declines to continue.
Party City still has a long way to go, and a number of roadblocks in its path. The balance sheet remains over-leveraged. Product demand is going to take a hit as social gatherings take time to get back to normal. And Party City, because of that debt, simply doesn’t have that kind of time.
We’ve seen high-risk retail stocks make huge rallies, with Stage Stores (OTCMKTS:SSINQ) being a recent example. But the issues facing the sector usually cause those rallies to reverse. I’m skeptical PRTY stock will be any different.
Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets. He has no positions in any securities mentioned.
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