If I had to design a long-term portfolio, I would look at 40% allocation toward large-cap companies. Typically, these are companies in established industries with robust cash and growing dividends. Another 40% of fund allocation would be to mid-size companies. These companies can be potential large-caps in the next five to 10 years. Finally, it makes sense to allocate 20% of the portfolio to small-cap and penny stocks.
Penny stocks can be portfolio-return catalysts. In the last few quarters, several penny stocks have delivered multi-fold returns. As an example, Future FinTech (NASDAQ:FTFT) surged 991% in one year with the crypto boom acting as fuel. Similarly, with renewed interest in cannabis stocks, Sundial Growers (NASDAQ:SNDL) surged 412% in the last six months.
The markets will continued to provide such opportunities.
So, let’s talk about seven penny stocks that have a crucial year ahead. Positive business developments for these companies can trigger a strong stock rally. They are:
- Borr Drilling (NYSE:BORR)
- Evofem Biosciences (NASDAQ:EVFM)
- Safe Bulkers (NYSE:SB)
- Nextleaf Solutions (OTCMKTS:OILFF)
- Timber Pharmaceuticals (NYSEAMERICAN:TMBR)
- iBio (NYSEAMERICAN:IBIO)
- KushCo Holdings (OTCMKTS:KSHB)
Penny Stocks: Borr Drilling (BORR)
The oil and gas industry was hit hard during the slowdown triggered by the novel coronavirus. Offshore drilling companies struggled to stay afloat. Borr Drilling has survived through a series of capital raises and adjustments to its debt-repayment profile.
Borr Drilling believes that the recent equity raises are catalysts for $1 billion in liquidity improvements through fiscal year 2023. It’s also worth noting that oil prices have been trending higher recently. If Brent oil sustains above $65 per barrel, it’s likely to be positive for Borr Drilling from the perspective of new order inflow.
BORR stock surged higher by 71% in the last month. The triggers were capital raise and high oil prices. I expect more upside for BORR stock if oil remains higher. On the flip-side, if oil trends lower, the company is likely to struggle.
Overall, it’s a make-or-break-year for Borr Drilling. The company managed to defer debt payments and raise capital. Borr Drilling also has a quality fleet that can secure long-term orders if market conditions are favorable. It remains to be seen if oil can support the potential bullish thesis.
Evofem Biosciences (EVFM)
EVFM stock, which currently trades around $4.25 and has a market capitalization of about $325 million, is another interesting name among penny stocks.
Evofem Biosciences is a clinical-stage biopharmaceutical company with a focus on women’s sexual and reproductive health. The company’s first commercial product (Phexxi) is a gel approved in the United States for pregnancy prevention.
The key point to note is that Phexxi was launched in September 2020. The results in the next few quarters will speak volumes about the potential acceptance of the product in the market. This is likely to dictate the EVFM stock price action. The company believes that the peak revenue potential for Phexxi is $2.5 billion. Clearly, if the results are encouraging, the stock can go ballistic.
In the pipeline, the company’s product also includes EVO100, which is currently in Phase 3 trials. The candidate is for prevention of chlamydia and gonorrhea in women. According to the company, the global cases for chlamydia and gonorrhea will likely reach 95 million by FY2025.
Therefore, Evofem Biosciences is catering to important unmet needs. This makes EVFM stock attractive. However, it makes sense to consider a small exposure. Once sales growth gains traction, positions in the stock can be increased.
Safe Bulkers (SB)
For the current year, SB stock has surged by 140% from oversold levels. I believe the stock is still attractive at a market capitalization of $318 million. As an overview, Safe Bulkers provides marine dry-bulk transportation services.
With improvements in the global economic scenario, SB stock has surged. It’s worth noting that the company’s time charter equivalent day-rate for bulk shipping was $8,094 in Q2 2020. This has increased to $12,319 in Q4 2020. As day-rates increase, the company’s EBITDA and EBITDA margin are likely to expand.
Another key point is that the company’s contracted fleet employment profile is 49% for the current year. For FY2022 and FY2023, the contracted fleet percentages are 18% and 16% respectively. It remains to be seen if global economic growth sustains and the contracted fleet percentage increases in the next few quarters.
Safe Bulkers reported total debt of $607.7 million as of Q4 2020. The company’s EBITDA for FY2020 was $64.3 million. Therefore, a leverage of 9.45 is high and a potential concern if there are renewed economic headwinds.
Overall, SB stock is among the attractive penny stocks. If economic recovery sustains through the current year, SB stock can deliver stellar returns.
Penny Stocks: Nextleaf Solutions (OILFF)
The cannabis sector has seen renewed interest in the last few quarters. OILFF stock, which currently trades around 21 cents, has the potential to deliver multi-fold returns in the next 12 to 24 months.
As an overview, Nextleaf Solutions identifies itself as an innovator in the cannabis extraction segment. The company has technology for the distillation of THC and CBD oils. With 70 issued patents for the company and more than 50 pending patents, there is reason to be bullish on OILFF stock. The company has 12 patents in the United States.
In terms of the business model, the company has extraction agreements with cannabis brands. In addition, the company plans to license patents to pharmaceutical partners. I believe that licensing can be a potential game changer for the company.
Extraction agreements with various cannabis companies can deliver revenue. However, the key to OILFF stock’s bull thesis is monetizing the patent portfolio. Margin and cash flow boost are likely from long-term licensing agreements for patents. Once there is development on that front, the stock is likely to make a big move.
Timber Pharmaceuticals (TMBR)
TMBR stock is another attractive pick from the penny-stocks space. The stock has seen significant rally in the recent past. However, at a market capitalization of just $36 million, TMBR stock is worth adding on correction.
As an overview, Timber Pharmaceuticals is a dermatology company with focus on orphan diseases. The company’s current pipeline includes drugs for congenital ichthyosis and localized scleroderma.
With an interesting pipeline, a company with $36 million valuation is worth considering. Just to put things into perspective, the company believes that 1.5 million people globally are impacted by congenital ichthyosis. Therefore, there is a big addressable market.
In terms of positive news, the company recently received an orphan drug designation for TMB-003 for the treatment of systemic sclerosis. The company plans to submit an initial new drug application to the U.S. Food & Drug Administration in FY2022.
The company has $14 million in cash and equivalents. This provides an ample buffer to fund clinical studies. I also believe that Timber Pharmaceuticals is an attractive acquisition target, especially if the company’s clinical trials make steady progress.
TMBR stock surged 200% in the last month. Some exposure can be considered on correction.
With iBio being among the companies working on a vaccine against Covid-19, IBIO stock has been in limelight in the last year. After surging to a high of $7.45, the stock trades around $2.05. Current levels are attractive for some speculative exposure to the stock.
The company’s Covid-19 vaccine candidate is still in the pre-clinical stage. That’s the key reason for a sharp decline in the stock after an initial exuberance. News on Phase 1 progress is one potential upside trigger for the stock.
Another point to note is that the company has an expanding bio-pharmaceutical pipeline. The pre-clinical stage drug program includes indications for systematic scleroderma and idiopathic pulmonary fibrosis.
iBio also has 98 issued patents with 30 patents in the United States. This can be another potential source of revenue in the coming years. iBio is very likely to pursue patent licensing to other pharmaceutical companies.
From a financial perspective, iBio reported cash and equivalents of $107.6 million as of December 2020. This provides the company with ample buffer for investment in clinical studies for the next 12 to 24 months.
Overall, IBIO stock is a purely speculative bet. If the company can make progress in the clinical studies, the stock can go ballistic.
Penny Stocks: KushCo Holdings (KSHB)
The cannabis sector has witnessed renewed investor interest. KSHB stock is among the attractive penny stocks from the cannabis sector. For year-to-date FY2021, the stock has surged by 117%. However, the stock remains attractive and is worth considering for the medium to long term.
KushCo Holdings is a provider of ancillary products and services to the global cannabis industry. The company derives 60% of its revenue from vaporizer hardware and technology. Further, 30% of revenue was derived from packaging, paper and supplies.
The company already has a presence in North America, South America and Europe. The global legal marijuana market size is expected to increase to $73.6 billion by FY2027. It goes without saying that the company is positioned for growth over the next decade.
It’s worth noting that for the first quarter of 2021, the company reported a second consecutive quarter of positive EBITDA. As the company’s EBITDA margin expands (with top-line growth) in the coming quarters, I expect KSHB stock to trend higher.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored more than 1,500 stock specific articles with focus on the technology, energy and commodities sector.