Global markets have been in a tough spot of late due to a lack of clarity on central banking policy. Investors are tentative, as many assets are trading at high multiples after a tremendous bull run. The May selloff, which is common under normal market circumstances, has now extended into late June. From penny stocks to big-name tech stocks, every corner of the market is uncertain.
What has me worried is the mixed narrative from analysts, all of the big bank analysts seem to have a different opinion regarding sector rotation and value versus growth. I’ve thus decided to present readers with seven penny stock picks that aren’t bound to global market consensus but rather idiosyncratic features. Many penny stocks are traded based on pure fantasy, but I’ve identified companies who’re monetizing their business models at scale; this should de-risk the investment whilst still taking advantage of tremendous upside.
A penny stock can be classified in a couple of ways. The Securities and Exchange Commission’s definition of a penny stock is any stock that trades below $5. An alternative classification groups penny stocks by market capitalizations of sub-$300 million. I used a hybrid criteria by only choosing stocks trading below $5, most of which have market caps below the $300 million mark.
My seven penny stock picks for today:
- Drone Delivery Canada Corp (OTCMKTS:TAKOF)
- Quarterhill Inc. (OTCMKTS:QTRHF)
- Resonant, Inc. (NASDAQ:RESN)
- Sangoma Technologies Corporation (OTCMKTS:SAMOF)
- Kraken Robotics Inc. (OTCMKTS:KRKNF)
- Zomedica Corp. (NYSE:ZOM)
- Asensus Surgical, Inc. (NYSE:ASXC)
These have all been hand-picked by making use of criteria which highlights company scale, industry growth rates, prospects of a moat, and shareholder value.
Penny Stocks: Drone Delivery Canada Corp (TAKOF)
Drone Delivery Canada designs, develops, and implements commercial logistic drone services internationally. The company’s value stems from the fact that its industry focus is on both software and hardware. Strong verticals enable them to maximize synergies whilst diversifying their business.
Founded in 2011, the stock has been overlooked, as it didn’t turn in revenue until the fourth quarter of 2020. Drone Delivery Canada doubled their $200,000 in initially recognized revenue to $400,000 in the first quarter of 2021, which saw the stock gain roughly 43% year to date. Analysts expect the company to recognize a further $2.8 million in revenue for the rest of the year due to various letters of intent materializing which were agreed upon in 2020.
The company has a debt/equity ratio of only 1.1%, the fact that they’ve started recognizing revenue on their income statement will enable them to leverage their balance sheet and allow them to expand operations. This is definitely a long-term hold but Canaccord Genuity sees nearly 50% upside in the stock for the next 12 months, which makes it an ideal pick if you’re a trader with a short-term time horizon.
Quarterhill Inc. (QTRHF)
Somewhat similar to the meme stock Marathon Digital Holdings, Inc. (NASDAQ:MARA), Quarterhill used to be a pure-play patent company but has since utilized its cash earned from patent sales to acquire tech companies. Their two acquisitions, namely IRD and Wilan, are EBITDA positive. IRD specializes in the transportation business by managing more than 16,000 roads with its ITS software. Wilan is an intellectual property company and now plays the role of Quarterhill’s IP portfolio, which includes various licenses and patents in automotive, semiconductor, medical, and packaging.
The reason why I like this stock is twofold. First, under GAAP accounting standards, you’re allowed to amortize IP once the software contributes to revenue. The amortization allows the company to earn revenue and amortize Research & Development instead of expensing it, which subsequently improves reported net income. The second reason is that the stock pays out a dividend with a 112.96% payout ratio.
The stock’s flow-through effect maximizes shareholder value, and the company uses profits on patents to acquire additional growth assets. As a result, investors can expect lucrative upside through a constantly improving asset base.
Penny Stocks: Resonant, Inc. (RESN)
Another intellectual property company, Resonant, taps into the 5G market with an industry focus strategy rather than attempting to compete throughout the entire value chain.
The company designs and develops filters for radiofrequency and frontends used in mobile devices, medical, Internet of Things, and related industries throughout China and Japan. The company has massive revenue growth year over year after its products started abruptly gaining traction during 2020.
Resonant is working capital-positive with $17 million at hand, and the company should be able to scale further in the near future. Analysts expect revenue to reach $14.75 million by December 2022 from its current level of $3.2 million. Whether that materializes or not, Resonant is a great long-term buy.
Sangoma Technologies Corporation (SAMOF)
Perhaps one of the more well-known penny stocks around. Sangoma manufactures, distributes, and supports voice and data connectivity components for software-based communication components internationally. This penny stock is suitable fore investors who’re searching for a company with a solid financial track record.
Sangoma has been profitable since 2013, with net income growing by 144.89% and 84.40% in 2019, and 2020 respectively. In addition, positive free cash flow has been a feature for the past five years, with a 5-year constant annual growth rate of 5.2%, exceeding the sector average by 6.2%.
I believe that free cash flow is key to the stock’s performance, I thus placed an absolute valuation on the stock. I used a metric that is popular in M&A but can be applied to any enterprise-based valuation.
By multiplying the free cash flow by the EV/EBITDA and dividing the result by shares outstanding, I determined that the stock is currently 33% undervalued. Institutional analysts from Beacon and Lake Street expect the stock to rise by more than 80% over the next 12 months. Sangoma is a great long-term buy and is a penny stock that actually holds deep value, which is rare.
Penny Stocks: Kraken Robotics Inc. (KRKNF)
One of Catherine Wood’s favorite industries to invest in is the robotics space, and there are definitely some interesting names there. Kraken develops, manufactures, distributes, and sells marine robotics software and hardware used in military and commercial operations.
The company is known as “Canada’s ocean company” and has just extended its $690,000 contract with Public Works and Government Services Canada. Kraken is a contract-based company which means that the stock will see volatile changes to both the upside and the downside. However, the company should provide more sustainable earnings in the longer term as they’ve already secured high-quality early-stage contracts and just need the company to expand in operating capacity to accommodate demands. Kraken is currently investing heavily in R&D, and I expect this to be a great long-term buy. Beacon expects the stock to gain 114% within the next 12-months.
Zomedica Corp. (ZOM)
I usually wouldn’t recommend a stock to investors that hasn’t got a track record of revenue, but Zomedica has registered pre-orders and has started developing a secondary product. Truforma is a BIO-SENSOR created by the company that detects thyroid diseases in cats and dogs. Zomedica is in a partnership agreement with Celsee for the development and commercialization of liquid biopsy assays and related consumables to detect cancer in companion animals.
Zomedica is a stock that has a lot of speculation and opinions surrounding it. Still, I see the stock as a safer investment than most start-up biopharma companies since it has gotten rid of its initial binary price effect by releasing its first product. The company also carries $276.6 million of cash on its balance sheet and won’t need to raise additional equity capital anytime soon.
In addition, Zomedica is backed by heavy hitters such as Vanguard and BlackRock.
This is the riskiest investment I’ve recommended in this article but considering product progress, balance sheet liquidity, the caliber of investors, and the speculative dip; I think this the ideal time to buy back in.
Penny Stocks: Asensus Surgical, Inc. (ASXC)
Another robotics pick, Asensus, optimizes minimally invasive surgery by digitalizing the interface between surgeons and patients.
Founded in 2006, the stock has only started gaining traction in the past year with a 400%-plus return. Four successive earnings beat accompanied the sublime return. Sure, Asensus was pushed higher by Redditors this year, but that’s resulted in a cash increase of 10.07x, which could get reinvested in R&D and might see the company reach prolific heights.
H.C Wainwright sees 25% upside for Asensus, and in my opinion, this could be a Reddit-fueled balance sheet that could assist the company in reaching what it always dreamed of.
Based on my experience as well as portfolio diversification theory, you’ll need to diversify your portfolio to a larger extent when trading penny stocks than traditional stocks, as the idiosyncratic risks are harder to diversify away. Having said that, the stocks I presented in this article have tangible value and aren’t fantasy speculation which means that they’re less risky than your typical penny stock. If you have any questions regarding these stocks or portfolio strategies, feel free to contact me directly!
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Read More: Penny Stocks — How to Profit Without Getting Scammed
On the date of publication, Steve Booyensheld a long position in TAKOF, QTRHF, SAMOF and KRKNF. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Steve Booyens co-founded Pearl Gray Equity and Research in 2020 and has been responsible for equity research and PR ever since. Before founding the firm, Steve spent time working in various finance roles in London and South Africa, and his articles are published on various reputable web pages such as Seeking Alpha, Benzinga, Gurufocus, and Yahoo Finance. Steve’s content for InvestorPlace includes stock recommendations, with occasional articles on crowdfunding, cryptocurrency, and ESG.