Penny stocks are a fascinating part of the stock market. The high-risk high-reward nature of penny shares makes them compelling. Everyone has seen that stock that went from a buck to $10 a share, creating a small fortune for traders. On the other hand, it’s no secret that most penny stocks aren’t great investments. After all, companies don’t usually come public at low share prices; they get there from consistently disappointing earnings and business performance along the way.
That leads us as investors to ask whether these penny stocks can mount a comeback, or whether they are stuck in a prolonged downward spiral.
However, there are a few traits that can lead to success, such as an improving industry backdrop, a strong balance sheet or a great competitive position that can lead certain penny stocks to soar once again. These are seven such penny stocks that stand out as having solid prospects going forward:
- Hexo (NYSE:HEXO)
- Castlight Health (NYSE:CSLT)
- BIO-Key International (NASDAQ:BKYI)
- Ambev (NYSE:ABEV)
- Clear Channel Outdoors (NYSE:CCO)
- Corporacion America Airports (NYSE:CAAP)
- Grupo Aval (NYSE:AVAL)
Penny Stocks to Watch: Hexo (HEXO)
Admittedly, I’ve been negative on HEXO stock in the past. Investors were definitely quite optimistic on marijuana stocks in prior times, and this caused significant overvaluation in Hexo and other second-tier marijuana companies.
However, the tide may be turning. If nothing else, with HEXO stock trading under 80 cents per share now, the price is right. The immediate catalyst is the upcoming presidential election. If the Biden/Harris administration pulls off the win, it should lead to a favorable turn of events for the cannabis industry. While it’s unclear if the new president would go for decriminalization or more of a policy of benign neglect, either way, it should set the stage for a more friendly government. We could expect changes, such as banks being willing to lend to cannabis companies.
This might not make a huge difference for Hexo immediately. That’s because Hexo is primarily focused on Canada and Quebec in particular. However, Hexo’s biggest problem recently has been excess inventory. Any additional markets opening up should improve conditions for other players. In the meantime, Hexo sees itself earning positive EBITDA in the first half of 2021. The company’s financials are still unimpressive at the moment, however with a rising marijuana market, HEXO stock may find its footing here.
Castlight Health (CSLT)
Software companies have been one of the hottest sectors of the market in 2020. So far, Castlight Health has failed to benefit. That’s understandable, as the healthcare software business has seen its revenue growth stall out over the past couple of years.
However, if there was ever a time for Castlight to find its footing, it’s now. Castlight offers a healthcare services portal, helping connect doctors and hospitals with patients. The importance of this sort of marketplace has grown with tele-medicine. Castlight is also involved in helping patients find Covid-19 testing sites and other such time-sensitive matters. However, going forward, the real opportunity is in its core employee health benefits management; coming out of Covid-19, companies may spend more money on modernizing their healthcare plans.
It’s unclear whether Castlight Health will be able to return to growth. However, we do know that the company has a solid balance sheet. As of the June 2020 quarter, Castlight had $44 million in cash on hand, against just $17 million of total debt. This gives the company plenty of runway to keep looking for a route to profitability.
As it stands now, the company has around $150 million in annual revenues, and a market capitalization of just $150 million. That’s a mere 1x sales for a software company. Now sure, Castlight has obvious flaws, namely that it has struggled with revenue growth and it generates significant operating losses. However, if it manages to capitalize off increased healthcare spending thanks to Covid-19, shares could move sharply higher.
BIO-Key International (BKYI)
BIO-Key is a company focused on multi-factor authentication, particularly using biometric inputs. Think things such as fingerprint reading devices to allow access to secure systems and facilities. While the company hasn’t gained much scale as of yet, it has announced new contracts recently, and the current pandemic could serve as a catalyst to drive more business in settings thanks to distance work. It also scored a timely contract recently to secure voter registration data.
BIO-Key raised a substantial sum of money this summer, giving it capital to keep developing its business. It also acquired PortalGuard, which has hundreds of customers for its enterprise secure log-on platform. All of this is to say that BIO-Key has multiple irons in the fire that could cause shares to surge from their current level at any time.
Readers should be aware that BKYI stock is indeed, like many penny stocks, quite speculative. Shares trade at 45 cents each, after all, and the firm does not have a history of profitability. With that in mind, it might be wise to use an active trading approach with that sort of stock. BKYI stock has a tendency to spike to $1 or so per share every so often. Taking profits on these periodic increases can help lower risk in trading this sort of low-priced volatile company.
Ambev is the subsidiary of global brewing titan Anheuser-Busch InBev (NYSE:BUD). As sometimes happens, the corporate offspring is more attractive than the parent. AB-Inbev is wracked by a huge debtload and a struggling beer market in the United States and parts of Europe.
Ambev, by contrast is exposed to more favorable geographies. Ambev gets the majority of its business from Brazil, though it also has brewing operations in Spanish-speaking South America, Central America and Canada. Shares of ABEV stock have gotten clobbered in recent years, primarily due to economic weakness in Brazil and Argentina. However, at some point, enough is enough.
Ambev holds no net debt, and has No. 1 market share in most of its geographies. And, aside from Canada, the markets Ambev serves have almost no craft beer threat. The stock is down now, because there has still been no operational pick-up for Ambev in 2020. Just when Brazil was getting back on track, the novel coronavirus pandemic hit. That shut down bars and restaurants, and also canceled many live sporting events that are such a part of drinking culture in South America. With Ambev’s strong balance sheet and dominant market position, however, this firm will offer refreshing gains as the world economy regains its footing.
Clear Channel Outdoors (CCO)
If you listen to radio, you might think of Clear Channel as the huge radio station franchise. But it’s not that anymore, actually. Rather, that business is now known as iHeartMedia (NASDAQ:IHRT). The remaining Clear Channel Outdoor business is focused on billboards and display advertising.
While standard billboards may not be especially attractive given long-term trends in car ownership, that’s the smaller fraction of Clear Channel’s business. The majority comes from advertisements on mass transit and ads displayed on the street in downtown areas. Demand for this sort of advertising obviously plunged with the pandemic, but should come back as people start working in and walking around major cities again.
CCO stock is currently at $1 because of debt concerns. Given its leveraged balance sheet, traders feared that Clear Channel might go bust. However, the stock has already rebounded from 36 cents to a dollar as the worst fears about Covid-19 haven’t played out. As things continue to recover, CCO stock could head back toward its pre-pandemic level of $3 per share.
And, as always, if you a clear sign of whether a company can mount a comeback, just look to the executives. Are insiders buying stock, or are they standing aside? In the case of Clear Channel, insiders haven’t given up. Clear Channel Director Benjamin Moreland purchased another 400,000 shares of CCO stock in August for $1.18 each. That amounted to nearly a half million dollar bet that Clear Channel is still viable going forward. And, with that purchase, Moreland now owns 996,225 shares of Clear Channel.
Corporacion America Airports (CAAP)
Corporacion America Airports is one of the world’s largest private airport operators. It owns concessions spanning from Italy to Brazil, Argentina, Uruguay and even the Galapagos Islands. Its airports combined handled 84 million passengers in 2019, putting it on par with Los Angeles International or London Heathrow.
Yet, since its initial public offering (IPO) in 2018, CAAP stock has collapsed. Shares are down from $16 to $2 now. There are two reasons for this. The first is that the company’s flagship property is the international airport serving Buenos Aires. Argentina’s voters chose a return to left-wing governance in 2019 and since then, the country’s currency has collapsed. Not surprisingly, investors have dumped Argentine assets.
What they’re missing, as it relates to CAAP stock, is that it collects its airport revenue in U.S. Dollars, not Argentine Pesos; CAAP earns $51 per international passenger at present. Thus, it is still entitled to a fine profit margin despite the economic mess. Second, 40% of the company’s business comes from its holdings outside of Argentina.
Even if you value Argentina at zero, the company’s airport holdings in Italy, Brazil and elsewhere generate roughly $150 million per year in EBITDA, yet the whole company is selling for just two times that figure in market capitalization. Again, that’s marking down Argentina to zero. International airport operators tend to trade for at least 10x EBITDA, with European ones (comparable to CAAP’s Italian holdings) going for at least 15x EBITDA. CAAP returning to 5x EBITDA, let alone 10x or higher would result in a multi-bagger stock price.
The other issue, of course, is Covid-19. However, the virus is now waning in South America. Many of the company’s airports have already reopened, and the key Argentine aviation market started up again last week. As traffic numbers improve, CAAP stock should soar.
Grupo Aval (AVAL)
Sticking with Latin America, we have Colombia’s banking franchise Grupo Aval. Aval itself may not be a well-known name, as it’s a holding company. However, it has a majority stake in several of Colombia’s largest banks including Banco de Bogota along with financial services businesses, an infrastructure arm, and banking operations across Central America which it purchased from GE (NYSE:GE) after the great financial crisis of 2008.
What’s the appeal of AVAL stock? There are several positive factors. For one, Aval is majority-owned by Colombia’s wealthiest man, Luis Sarmiento, who is currently worth a cool $9 billion or so. Having the bank run by the country’s wealthiest person certainly insulates you from certain political risks. To that point, Colombia has a highly sheltered banking system, with its three major banking companies controlling two-thirds of the overall market. This allows the banks to earn above-average loan margins and earn substantial fee income.
Aval is also attractive as an income investment. AVAL stock yields nearly 7% at the moment. And, interestingly, Aval pays the dividend out monthly. Thus, it can serve as a significant piece of a monthly income portfolio.
Shares of the banking firm declined from $9 to $3.30 with the pandemic. This made sense initially, as Colombia was hit hard by the pandemic and took a while to reopen. However, things have turned the corner.
I’m a permanent Colombian resident, and I can tell you that after a brutal summer, the economy here is showing signs of life, particularly since the airports reopened last month. AVAL stock is back up to $4.75 now as we see the first signs of optimism. The bank isn’t going to recover to pre-Covid levels tomorrow. However, with AVAL stock going for just 6x earnings, there’s plenty of room for further upside back to $6 or $7/share in the coming months. In the meantime, shareholders get the fat monthly dividend.
On the date of publication, Ian Bezek held long positions in CAAP, ABEV and AVAL stock.
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.