The allure of penny stocks can be very strong. Every investor dreams of putting a few thousand dollars into a penny stock and then having it turn into the next Apple (NASDAQ:AAPL) or Microsoft (NASDAQ:MSFT). But that doesn’t happen too often, unfortunately.
Stocks that are trading at low prices are doing so for a reason. Many of these risky companies won’t survive. They are destined for bankruptcy.
A lot of penny-stock companies lose money. And as the crushed GameStop (NYSE:GME) traders found out recently, a stock is eventually valued by how much money the company makes. If it doesn’t make a profit at some point, the shares will end up being worthless.
In order to find stocks that will perform well, analysts usually consider the fundamentals. These include basic things like how much revenue a company can generate and how profitable it is.
Unlike most names in this risky part of the equity market, the following seven low-priced companies have good fundamentals. Now, this doesn’t guarantee that the shares will perform well over the long-term. But they probably have a much better chance than penny stocks that have poor fundamentals.
- USD Partners (NYSE:USDP)
- Telefonica (NYSE:TEF)
- Elevate Credit (NYSE:ELVT)
- Berry Corporation (NASDAQ:BRY)
- BP Prudhoe Bay Royalty Trust (NYSE:BPT)
- Flexible Solutions International (NYSEAMERICAN:FSI)
- Mediaco (NASDAQ:MDIA)
Penny Stocks: USD Partners (USDP)
USD Partners is in the energy business. It buys, develops and operates infrastructure assets and logistics solutions for companies in the industry. Founded in 2014 and based in Houston, Texas, the company has customers in the U.S. and Canada. At current price levels, USDP has a market capitalization of about $147 million.
One good fundamental for USDP stock is its ability to pay a dividend. This shows that the company is operating with strong cash flow. Its annual payout is 44 cents a share and it’s yield is currently 8.71%.
Another way to fundamentally value a company is to analyze its enterprise value. Some analysts think this is a good way to calculate what a company is actually worth, as opposed to its stock market valuation. That calculation includes the market cap of a company and adds the debt and cash on the balance sheet.
USDP has an enterprise value of $357 million according to Seeking Alpha, more than twice the value of its market cap. Based on that fundamental, this pick of the penny stocks is extremely undervalued.
Next up on this list of penny stocks is Telefonica, a company that provides mobile and fixed communication services. TEF operates in both Europe and Latin America and was founded in 1924 . The company is based in Spain.
Like USDP, TEF stock pays a high dividend — 46 cents annually with a 9.91% dividend yield.
Analysts also look at a company’s book value to determine how much it is actually worth versus how much the market is currently valuing it. Book value is “the net difference between that company’s total assets and total liabilities.”
The average price-to-book ratio of a company in the S&P 500 is currently 4.26. This means the shares trade 426% higher than their book value. TEF has a price to book ratio of 1.84. Based on this measurement, shares are very undervalued.
Wall Street also likes Telefonica right now. For analysts tracked by the Wall Street Journal, TEF’s average target price is currently $5.79 per share. This is nearly 28% higher than where it’s trading today.
Elevate Credit (ELVT)
Elevate Credit is a credit company that offers solutions like loans, cards and more to borrowers who have poor credit. ELVT has customers in both the U.K. and the United States.
One of the most common metrics used by analysts to value companies is the price-to-earnings (PE) ratio. This is a measure of how much earnings each dollar investment will bring.
For example, if a company has a PE ratio of 10 and its stock is trading at $20, it is earning $2 a share. If it is trading at $100, it is making $10 a share.
In general, lower PE ratios are considered better because it means the cost of investing in the earnings stream is lower. If a stock is $100 and has a PE of 50, then it’s only earning $2 a share.
Right now, ELVT stock has a forward PE ratio of 19.03. With the average PE ratio of a S&P 500 company well above that right now, Elevate is undervalued. That makes it one of the more promising penny stocks.
Berry Corporation (BRY)
Berry Corporation is a company that works in energy, exploring and developing oil reserves located in the western United States. The company was founded in 1909.
Like many shares in this industry, shares of BRY stock have been crushed over the past few years. But now they have reached levels that would make some consider it the time to buy, especially based on its current valuation.
For example, the stock’s current dividend yield is over 10% while the average yield of a stock in the S&P 500 is about 1.5%. That makes this one of the penny stocks look especially cheap.
On top of that, Berry also has a low price-to-earnings ratio. According to Seeking Alpha, it’s trailing PE is 9.26. That metric makes the company attractive at current levels.
Finally, this is occurring at the same time that oil prices are soaring. So, energy companies like Berry are already becoming increasingly valuable.
BP Prudhoe Bay Royalty Trust (BPT)
BP Prudhoe Bay Royalty Trust is — you guessed it — a trust company. The firm holds interests in the Prudhoe Bay oil field, which is located on the North Slope of Alaska. The company was founded in 1989.
As you can see on the above chart, BPT stock trended lower from last March through November. Shares dropped from around $7 to lows around $1.20. Since then, though, they have recovered and are currently trading at $4.62 today.
Yet, despite this recovery, the shares are still cheap by some measurements. At current prices, the stock has a trailing PE ratio of 6.29. That’s good for this one of the penny stocks.
As we have seen before, a low PE ratio is usually a positive fundamental. The lower the ratio, the cheaper it is to invest in the stream of earnings that the stock has.
Flexible Solutions International (FSI)
Flexible Solutions International develops, manufactures and sells chemicals that slow the evaporation of water. Based in Canada, it has customers in its home country, the United States and internationally.
Despite the economic slowdown, FSI was able to turn a profit in its last four quarters. In its last quarter of 2019, it earned 4 cents a share. In the next three quarters, Flexible Solutions International had earnings per share of 10 cents, 9 cents and 5 cents, respectively. Of course, this isn’t a lot. However, many companies in its industry reported losses last year.
Right now, the trailing PE ratio of FSI stock sits at 13.89. Measured by this metric, FSI is a better investment than the average stock in the S&P 500.
This means a dollar investment into this pick of the penny stocks could capture more earnings than an investment in the typical S&P 500 company.
Last on this list of penny stocks, Mediaco owns and operates radio broadcasting stations in the United States. The company was founded in 2019 and is based in Indianapolis, Indiana.
Right now, MDIA stock has a price-book ratio of 2.72. As I’ve noted before, the average price-book ratio in the S&P 500 is about 4.26. So, MDIA is undervalued based on that metric.
On top of that measurement, long-term fundamental investors should also consider a company’s margins. Right now, according to the Wall Street Journal, MDIA has operating margins of 10.52%.
This means the company is operating at a profit. Obviously, that should give it better chances of success versus a company that is operating at a loss.
On Penny Stocks and Low-Volume Stocks: With only the rarest exceptions, InvestorPlace does not publish commentary about companies that have a market cap of less than $100 million or trade less than 100,000 shares each day. That’s because these “penny stocks” are frequently the playground for scam artists and market manipulators. If we ever do publish commentary on a low-volume stock that may be affected by our commentary, we demand that InvestorPlace.com’s writers disclose this fact and warn readers of the risks.
Read More: Penny Stocks — How to Profit Without Getting Scammed
On the date of publication, Mark Putrino did not have (either directly or indirectly) any positions in the securities mentioned in this article.