Penny stocks have a well-earned reputation for risk. And that extends even beyond the most dangerous and most questionable names in the group.
That’s because penny stocks have been fertile ground for swindlers and so-called “pump and dumps” for decades. For example, last year one penny stock soared and then got suspended because it shared a similar ticker to hot growth play Zoom (NASDAQ:ZM). Another, Clubhouse Media Group (OTCMKTS:CMGR), got a social media-driven boost solely because it shared a name with an app that was surging in popularity.
But even if an investor focuses on the “real” businesses that qualify as penny stocks — defined here as any stock with a price under $5 — risks still remain. Stocks with a price below $5 are often once-great companies looking for a turnaround — like Gamestop (NYSE:GME), which was near $4 in August — or companies that have continually disappointed. The dangers in both kinds of investments are self-evident.
And within that group, there are companies that simply aren’t going to make it. For some, the same pressures that sent their stock prices to the low single-digits won’t let up. For others, the flaws in the business model will persist.
Of course, what makes penny stocks fascinating — and occasionally attractive — is that the high risks also create high rewards. If the turnaround works, or if the potential of the business is finally realized, the gains can be huge.
For these seven names, some investors see the rewards. And in some cases, they should. But the bear case needs to be kept in mind, too. These pick all risk hitting $0:
- Globalstar (NYSEAMERICAN:GSAT)
- Clear Channel Outdoor (NYSE:CCO)
- R.R. Donnelley & Sons (NYSE:RRD)
- Quad/Graphics (NYSE:QUAD)
- Peabody Energy (NYSE:BTU)
- Ucommune (NASDAQ:UK)
- Pennsylvania Real Estate Investment Trust (NYSE:PEI)
7 Penny Stocks That Could Go to Zero: Globalstar (GSAT)
Historically, satellite companies like Globalstar have been enormously high-risk, high-reward investments. The amount of capital required to start the business often leads to heavy debt. So, any missteps can create real danger.
Indeed, in the span of three months last year, three different satellite companies filed for bankruptcy. Obviously, the pandemic was a key factor. But none of the companies — including Intelsat (OTCMKTS:INTEQ) — had left themselves any room to manage unexpected risk.
Globalstar finds itself in a similar situation. The company closed 2020 with debt of $372 million. That’s about 10 times adjusted EBITDA (earnings before interest, taxes, depreciation and amortization). That leverage ratio is enormously concerning and raises the prospect of yet another bankruptcy in a sector that has had more than its fair share.
However, GSAT stock also highlights the potential rewards of penny stocks. Even with a sharp pullback of late, it has risen 288% so far in 2021. Partnerships with Nokia (NYSE:NOK) and Qualcomm (NASDAQ:QCOM) have stoked investor optimism. A recovery in oil and gas exploration should help, too.
History suggests that investors should stay cautious. GSAT is still up just 3% over the last decade. It has never generated consistent net profitability or free cash flow. But, like so many penny stocks, the possibility of Globalstar finally realizing its potential continues to tantalize.
Clear Channel Outdoor (CCO)
CCO stock is another one of the penny stocks that has seen huge 2021 rallies, with 227% returns over the past year. Some investors see the billboard operator as a part of the “reopening trade,” as normalcy returns to key customers like restaurants and tourist attractions.
However, the problem is that Clear Channel was struggling even before the pandemic hit. In late 2019, CCO hit a seven-year low. Plus, like so many penny stocks, debt remains a concern. Clear Channel has over $7.3 billion in total debt. It expects cash interest payments of $361 million in 2021, which is nearly 60% of adjusted EBITDA for 2019 (before the pandemic struck).
So, there simply seems to be a crunch coming at some point. With $785 million in cash, Clear Channel certainly can weather near-term storms. But this is a business that was stagnating even before the pandemic. That kind of performance doesn’t look good enough going forward.
R.R. Donnelley & Sons (RRD)
In 2016, after Xerox (NYSE:XRX) rejected a merger offer, R.R. Donnelley split into three companies. One, LSC Communications, has already filed for bankruptcy. But RRD has its own concerns.
For the most part, RRD has been a big winner in 2021. Fourth-quarter earnings, including a strong outlook for the new year, sent the stock up 32% in a single session last month. Year-to-date (YTD), shares of RRD stock are up 80%.
Yet R.R. Donnelley is far from out of the woods. Revenue in 2020 saw a 13% decline versus 2019 results. Here, too, pre-pandemic performance wasn’t great: 2019 sales were also down slightly on an organic basis, with adjusted operating profit up only marginally.
At the moment, RRD’s performance is good enough. But debt concerns still lurk. The split did help the balance sheet, as the company monetized stakes in both LSC and the more successful Donnelley Financial (NYSE:DFIN). Still, net debt remains above $1.2 billion, about three times 2020 adjusted EBITDA. Basically, RRD is one more misstep away from getting into trouble again.
It was weakness in print demand that sent LSC into bankruptcy. Now, the worry is that the same trend will hit Quad/Graphics, the next name on this list of penny stocks.
This is a company that lost 25% of its revenue last year. Obviously, the pandemic was a big factor. But like so many penny stocks on this list, trends were negative even before the pandemic. And it’s likely that some customers lost during 2020 are businesses that simply aren’t coming back.
Bankruptcy isn’t likely on the table near-term, barring a resurgence of the novel coronavirus. What’s more, QUAD’s bond prices have recovered, though its 2022 bonds still yield a rather high 7%.
Still, we’ve seen the danger of combining a high-debt load and a declining end market too many times. At the very least, that combination creates little room for error when it comes to QUAD stock.
Peabody Energy (BTU)
At some point, coal producer Peabody Energy will cease to exist. The stock market tells us that, given soaring share prices of so many solar companies and the optimism toward renewable-energy plays. Even General Electric (NYSE:GE) is getting in on the action, with countries across the world — including the U.S. — looking to end their reliance on coal.
So, the question for BTU stock is how much cash can it return to shareholders before that happens. Right now, the answer appears to be little, if any. Peabody has suspended its dividend. It also has significant debt to pay off and bond prices project that it may not be able to do so. 2024 bonds trade at less than 60 cents on the dollar. Peabody itself offered to buy back a small portion of the issue at just 80% of par.
Meanwhile, 2020 results were disastrous, with adjusted EBITDA plunging to $258 million from $883 million the year before. Obviously, 2020 was an unusual year to say the least, but the long-term trend remains negative. Few penny stocks — indeed, few stocks of any kind — seem to have a better shot at $0 than BTU.
Amid what increasingly looks like a bubble, there are going to be special purpose acquisition company (SPAC) mergers that wind up at $0. Ucommune might be one of the first.
UK stock only came into existence in November, when its merger with Orisun Acquisition closed at a price of $10. Now, UK is already below $3. The shorthand for its business model — the “WeWork of China” — isn’t 100% accurate (like most U.S.-China comparisons). However, it does highlight the risks here.
Ucommune signs long-term contracts for office space and makes money through short-term lending. As with WeWork, that’s a great business model when it works and disastrous when it doesn’t. And also like its counterpart, Ucommune withdrew an initial public offering (IPO) before going the SPAC route. (WeWork appears to be doing the same.)
There are signs that the business model isn’t working. Adjusted EBITDA loss in the first nine months of 2020 was nearly 25% of revenue. The company also closed office space during 2020 even as China emerged from the pandemic earlier than other countries. Plus, the company’s balance sheet is not in great shape, even after it issued stock and warrants at $4.05 per unit in January.
All told, there’s real risk of a vicious cycle here, in which the company’s financing dries up and its model collapses. In fact, there is some evidence the cycle already has begun for this pick of the penny stocks.
Pennsylvania Real Estate Investment Trust (PEI)
Lately, we’ve seen mall operators rally from March lows. In particular, there seem to be hopes that widespread vaccinations will drive a huge increase in traffic and a big 2021. For example, shares of Simon Property Group (NYSE:SPG) — the largest mall owner in the world — have nearly doubled over the past year, including a 31% rally YTD. Macerich (NYSE:MAC) has also rallied nicely, though its boost from the Reddit rally has mostly faded.
Likewise, PEI stock has been one of 2021’s biggest winners in the group, with a 92% rally as of this writing. But, as with many penny stocks, the optimism seems misguided.
This is a company that was struggling long before the pandemic. PEI entered 2020 below $5 after touching $25 less than four years earlier. Plus, debt is a concern. So is the declining long-term trend of mall traffic, something that will likely accelerate given the pandemic-driven shift to e-commerce.
To be sure, this real estate investment trust (REIT) might have a solid 2021. But that’s not the issue. It’s what comes after that which raises the risk. PEI might be the next leveraged mall operator to head into bankruptcy.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.
After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.