The novel coronavirus has dramatically transformed the economy. We won’t know quite how extensive and how permanent the changes are until we’re farther along into the recovery. Regardless, it’s clear that things aren’t going back to the way they used to be. And for these seven penny stocks, that’s terrible news.
While the economy is starting to recover, many people seem to be overestimating the speed and sharpness of the turnaround. Looking at Q2 earnings results, outside of the technology sector, it’s clearly going to be a long slow comeback.
And for these seven penny stocks in particular, they don’t have the benefit of time. With losses mounting, many of these firms will struggle to remain solvent and operational for much longer:
- Chesapeake Energy (OTCMKTS:CHKAQ)
- Washington Prime (NYSE:WPG)
- Genius Brands (NASDAQ:GNUS)
- Trivago (NASDAQ:TRVG)
- Just Energy (NYSE:JE)
- Top Ships (NASDAQ:TOPS)
- Ascena Retail (OTCMKTS:ASNAQ)
Let’s take a look behind each of these penny stocks’ troubled future.
Chesapeake Energy (CHKAQ)
Chesapeake Energy is the proverbial cat with nine lives. Many times over the years, it appeared that Chesapeake was heading to the grave. Each time, it managed some way to remain alive and kicking for another day. Speculators seem to be giving the company the benefit of the doubt even now.
Unlike prior times, however, Chesapeake stock is truly past the point of no return. As I recently explained, Chesapeake is officially in bankruptcy and there’s no path forward for its existing shareholders. Chesapeake’s own restructuring documents explain that the common stock will be canceled with no redeeming value.
Chesapeake racked up billions of dollars of debt over the years in hopes of building a huge oil and gas empire. While the company got production levels up, pricing never quite cooperated. With the slump in energy prices, Chesapeake’s properties simply didn’t generate enough cash to pay its debts. Now, with the pandemic, the debt market slumped as well, closing off any route to reworking Chesapeake’s balance sheet. It’s game over now; the firm is bankrupt and the stock will be cancelled. Don’t overthink this one — if you still have CHKAQ stock, salvage what you can.
Washington Prime (WPG)
Like many penny stocks, Washington Prime has retained a faithful group of shareholders. Washington Prime was a spin-off of lower-quality mall and shopping center properties from mall giant Simon Property Group (NYSE:SPG) back in 2014. Simon was astute in unloading those shares then; Washington Prime’s smaller regional and suburban malls were still back in favor at the time.
WPG stock started trading around $20 in 2014. But by the start of 2020, shares were down to less than $3. The company’s funds from operations (FFO) were plunging around 10% annually, even before this year. Needless to say, the retail apocalypse had pummeled this company.
Mall bulls hope that the landlords will be able to swap out failing department stores for restaurants, fitness centers and other experiential services. This may work in big markets. It almost certainly won’t work for Washington Prime — WPG is loaded up with malls in small cities in states such as Ohio, Kentucky and Kansas. These places simply aren’t going to support many destination luxury malls.
The old model, a bunch of in-line stores anchored by Sears (OTCMKTS:SHLDQ) and J.C. Penney (OTCMKTS:JCPNQ), made sense. Before the internet, department stores were great in small cities. But with the department stores gone, there’s little reason for the mall in general. The tenants that are still viable can simply move to outdoor shopping centers which have easier vehicle access and lower rents. In any case, Washington Prime’s finances are so strained that it’d likely be unable to redevelop many of its malls, even if it were economically justified.
Already, struggling mall owner CBL Properties (NYSE:CBL) has slumped to a stock price of just 20 cents and has been late with some of its interest payments. At 70 cents, WPG stock isn’t far behind its peer in the slide toward reorganization.
Genius Brands (GNUS)
You may remember Genius Brands from a month ago. Out of the blue, GNUS stock shot up from a dollar to as high as $11 per share. This came on news of the company launching its application, Kartoon Channel, showing free kid-friendly content. It initially scored a number of downloads and reviews and generated buzz. Traders did the rest, briefly bidding the stock to the stratosphere. It was a trade that fit the quarantine times.
However, the hype has worn off, and GNUS stock has collapsed. Shares are back to $2 and continue trending lower. At this point, traders may wonder how much worse it can possibly get. The answer is, however, that downside is potentially 100%, even from this reduced starting price.
Here’s why it belongs on this list of penny stocks with little hope left. Genius has been in business for many years, trying to market its video-on-demand channel, along with individual shows it has produced such as Llama Llama. None of these have taken off. The company has produced between $0.9 million and $6.6 million in revenues each of the past 10 years. That’s not enough to remain a profitable successful entity.
However, in the past, Genius kept a tight lid on costs, and was losing just a few million dollars a year in running its fledgling media business. Now, though, they’ve let costs explode. Operating losses have soared to $12 million per year, even as revenues haven’t meaningfully increased. It will get much harder to fund Genius going forward, particularly since a large crop of traders were burned with the recent surge and then collapse in GNUS stock.
Travel booking site Trivago is caught in the center of the pandemic. For obvious reasons, few people are using the website nowadays. Trivago’s bookings fell by a third in Q1 of this year. But that was just an appetizer for the main event. In Q2, Trivago’s revenues plunged 93% to just 16 million Euros for the quarter.
This is a massive problem, as Trivago was in poor financial condition even prior to the crisis. There’s a reason TRVG stock traded for just $2.50 before Covid-19 got going. Trivago has never reached meaningful recurring profitability, and there were doubts about whether it would be able to reach operating profit scale.
Now that certainly won’t be happening anytime soon. The company lost more than 20 million Euros in operations last quarter. It still has around 200 million Euros left on the balance sheet, but that could deplete quickly at the current rate. At this point, it’s unclear if Trivago is a viable business model, or at least one that should remain as an independent company. Major holders, such as Expedia (NASDAQ:EXPE) may consider acquiring the rest of Trivago to try to revive the brand. In any case, it’s hard to see Trivago recovering as a standalone company. For that reason, it belongs on this list of penny stocks to avoid.
Just Energy (JE)
Just Energy is largely unknown to many investors, but it’s infamous to others. For years, Just Energy paid a huge dividend, and also had a juicy preferred share stock offering. Yield-seeking investors plowed into these vehicles to boost their income. However, the underlying entity paying out those dividends wasn’t sturdy.
Just Energy built a bit of an odd business model: It buys electricity from power utilities and then resells it to power consumers at a fixed cost over a long-term contract. The thinking was that end users don’t like volatile energy prices, and would be willing to use a third party to flatten out pricing risk. It’s unclear, however, whether there was wide demand for this service.
Over the years, Just Energy was dogged by reports of pushy door-to-door sales techniques and misleading marketing tactics. Just Energy shifted to more brick-and-mortar retail locations to sell its services, but this apparently didn’t work either.
We know as much because the company’s financials continued to spiral downward. It suspended the previously sacrosanct dividend last year. And this year, it announced that it will be reorganizing the company. To be clear, at least so far, this isn’t an outright bankruptcy where the existing stock gets wiped out.
In the recapitalization, the lenders and new investors are plowing hundreds of millions of dollars into the company. This will give it enough wiggle room to potentially turn around the business. Meanwhile, holders of current JE stock will get 28.8% of the company’s equity post-recapitalization.
That may not sound awful; 29% is a reasonable chunk. However, it’s still worth far less than the current share price is going for. The company will also be implementing a 1:33 reverse split, meaning that 1000 old shares of JE stock will be just 30 going forward. So don’t look at the 40 cent share price and think it’s cheap. A huge reverse split is coming. Additionally, it’s far from clear Just Energy’s basic third-party energy retail business is even practical in a post-pandemic world.
Investors should scratch this one off their penny stocks watchlist for good.
Top Ships (TOPS)
My next pick is the lowest-priced penny stock on this list. Trading at a mere 9 cents per share as of this writing, some people might think Top Ships is so cheap that it must inevitably bounce. But don’t let the share price fool you, as this 9 cent stock is actually quite expensive. There are close to one billion shares of Top Ships outstanding, meaning the market capitalization is nearly $100 million. Not so cheap.
Top Ships stock spiked earlier this year around hopes of higher shipping rates. A switch in fueling standards was supposed to cause a major vessel shortage in the shipping industry, leading to higher prices. Needless to say, the coronavirus ruined this thesis — when far fewer people are engaging in economic activity, it doesn’t matter if you have a vessel shortage because you don’t need much cargo transportation anyway.
In the case of Top Ships, even if the original thesis had played out, the stock likely still would have taken on water. Management has run the company poorly over the years, creating an absolutely breathtaking disaster for shareholders. Adjusting for reverse splits, TOP stock traded for as much as $5,000,000 per share in 2009. Now it goes for 9 cents. Even if Top Ships manages to survive 2020, the future seems inevitable — another reverse split, more shareholder dilution, additional ongoing losses.
Ascena Retail (ASNAQ)
With Ascena’s stock still trading for around 40 cents per share, some traders have the idea that Ascena could mount a comeback. But the retail company is already on the way out.
The company controlled a variety of retail concepts, including Ann Taylor, Justice and Lane Bryant. But its run is almost over. The company filed for bankruptcy near the end of July. Normally that would mean the stock would drop immediately to almost zero. In this case, however, Ascena stock initially surged as much as 100% as short-term traders piled into the stock. It has been the summer of frenzied trading in bankrupt stocks, and Ascena briefly joined the party.
Unlike, say, Hertz (NYSE:HTZ), Ascena’s shares won’t remain elevated for long. The Nasdaq already de-listed Ascena’s stock from its exchange on Aug. 4. Even so, Ascena retains considerable trader interest on the over-the-counter market. The common stock is exceedingly likely to be wiped out in this bankruptcy reorganization, though.
Lenders plowed a fresh $150 million into the company to keep it running during bankruptcy. In return, those creditors gained priority over the existing stakeholders. With retail continuing to lose tons of money in the current environment — and Ascena struggling even before Covid-19 — it’s hard to imagine any scenario where things could turn around fast enough to bail out existing shareholders’ position in Ascena. That makes it one of the more worrisome penny stocks on the market today.
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 held no positions in any of the aforementioned securities.