The Evergrande crisis seems like China’s Lehmann moment. The markets have been jittery and it remains to be seen if there is a larger spill-over. Amidst this concern, the markets continue to provide investing and speculative opportunities.
If I had to focus on buying large-caps, I would look at low-beta stocks. These stocks would protect the portfolio from capital erosion. Further, if I had to consider some penny stocks, it’s a good time to look at beaten down names. Penny stocks that have already surged look risky considering broader market sentiments.
Therefore, my focus is on the hottest penny stocks that have been cooling-off in the last few quarters. The correction is due to temporary fundamental factors, dilution or profit booking.
Let’s talk about seven penny stocks that are worth adding to the portfolio for the next few quarters.
- Yamana Gold (NYSE:AUY)
- CarLotz (NASDAQ:LOTZ)
- Ayro (NASDAQ:AYRO)
- Electrameccanica Vehicles (NASDAQ:SOLO)
- The a2 Milk Company (OTCMKTS:ACOPF)
- Sundial Growers (NASDAQ:SNDL)
- Borr Drilling (NYSE:BORR)
These penny stocks, after a meaningful correction, look poised for a sharp reversal. It’s important to note that the portfolio allocation to these stocks should not be more than 10% to 15%.
7 Hottest Penny Stocks You Can Buy Today: Yamana Gold (AUY)
AUY stock has declined by 29% year-to-date in 2021. This shouldn’t come as a surprise given the recent correction in gold. Additionally, there’s the fact the Fed is likely to begin tapering later this year.
However, I see this correction as a buying opportunity for AUY stock. Real interest rates are likely to remain negative for an extended period, so precious metals will remain in an uptrend.
Yamana Gold currently has a production platform of one million equivalent gold ounces. The company expects to sustain these levels of production through 2026. Furthermore, its Wasamac asset is likely to provide production upside in 2027 and beyond.
Another important point to note is that the company reported an all-in-sustaining-cost of $1,081 per gold equivalent ounce in Q2 2021. If AISC sustains at current levels, Yamana Gold is positioned to report healthy cash flows even if gold prices are around $2,000 an ounce.
For Q2 2021, the company reported $167.8 million in operating cash flow and $51.2 million in free cash flows. Additionally, the company has a liquidity buffer of $702 million as of Q2 2021. Considering the cash flow and liquidity profile, the company has ample flexibility to sustain dividends and pursue aggressive production growth.
AUY stock therefore seems undervalued. It wouldn’t be surprising if the stock doubled over the next few quarters.
LOTZ stock is another beaten down name among penny stocks that seems positioned for a reversal. The stock declined sharply by 52% in the last six-months. There are fundamental reasons for the downside with growth likely to disappoint; however, the sell-off seems overdone.
As an overview, CarLotz is a consignment-to-retail used vehicle marketplace. The car resale market, which is worth $841 billion, is largely fragmented, providing the company with a growth opportunity. Even if the online resale segment is just 10% of the total market, its addressable market is significant.
In November 2020, CarLotz guided for sales of $356 million for 2021. The company expected sales to accelerate to $945 million in 2022. However, these estimates look unrealistic at this point. That’s a key reason for the stock slide.
For Q2 2021, CarLotz reported revenue of $50.8 million. On a year-over-year basis, growth was healthy at 92%. However, that still implies an annualized revenue in the range of $200 to $250 million. That would be below the November 2020 guidance. As a matter of fact, the company has withdrawn its 2021 guidance.
Even after discounting this factor, LOTZ stock looks cheap after a big correction. I wouldn’t be surprised if there is a strong reversal in the coming months.
Electric vehicle names have attracted investor attention given their impending growth potential over the next decade. After a 48% correction in the past six-months, AYRO stock looks attractive.
Ayro is a manufacturer of electric vehicles for urban and community transport. The company’s current models include Club Car, AYRO 311 and electric vaccine vehicles.
It’s worth noting that the company already has a purchase order worth $4.9 million for Club Car. The order is from Gallery, a leading manufacturer of mobile food, beverage and merchandising carts and kiosks.
Gallery will be “customizing the Club Car Current to support the growing demand for on-board food and retail delivery options.” While its order backlog is slim, Ayro seems to be moving in the right direction.
The company is also focused on a next generation e-delivery vehicle and system that will cater to the $45 billion U.S. restaurant delivery market. A few big orders in the coming quarters will serve as a catalyst for a significant stock reversal.
On the flip-side, it seems likely that cash burn will sustain in the medium-term. However, the company has a cash buffer of $88 million. Stock upside on order intake acceleration is likely to be an opportune time to raise funds.
Electrameccanica Vehicles (SOLO)
SOLO stock is another interesting name among penny stocks suffering downside momentum over the last two quarters. However, with the company soon launching customer deliveries of SOLO electric vehicle, a reversal might be round the corner.
Electrameccanica is a manufacturer of a single-seat electric vehicle, which comes at a base price of $18,500. This lower price point is likely to attract consumers. Additionally, the company is targeting SOLO fleet service for restaurant delivery, rentals and courier.
From an investment perspective, another reason to like SOLO stock is the company’s asset-light business model. Currently, manufacturing has been outsourced to a strategic partner in China.
That partner is capable of producing 20,000 SOLO’s annually. Once sales gain traction, it’s likely that Electrameccanica will consider setting-up its own manufacturing.
Electrameccanica will also be unveiling the next-generation global version of the SOLO. So the company has plans to enter new geographies in the next few years.
An attractive price, asset-light business model and a differentiated product offering make the stock worth considering. After an extended period of correction, upside seems likely as the company commences deliveries.
The a2 Milk Company (ACOPF)
ACOPF stock has been depressed of late, with the company’s revenue being impacted due to the Covid-19 pandemic. But this seller of A2 protein type branded milk and related products is still attractive for the long-term.
For 2021, the company reported revenue of $1.2 billion, down 30% on a year-over-year basis. For the same period, the company’s adjusted EBITDA declined by 75.8% to $133.8 million.
It’s worth noting that infant nutrition product has been a key growth driver for the company. In May 2021, China allowed couples to have up to three children. The company’s infant nutrition product is likely to benefit from that policy shift over the next few years.
The a2 Milk Company has also been expanding its geographical reach. The company now has presence in China, Australia, New Zealand and United States. Further, the company has also expanded in Canada through a licensing agreement with Agrifoods. In Australia, the company commanded a market share of 12.2% as of June 2021.
Overall, the pandemic has increased the level of health awareness among consumers. A2 protein type branded milk is likely to witness incremental demand in all key markets. ACOPF stock looks attractive after a correction of 41% over the last six-months.
Sundial Growers (SNDL)
After peaking at $3.96 in February, SNDL stock has been in a downtrend ever since. Besides profit booking, significant equity dilution has taken the stock lower. However, the stock looks interesting now, at 68 cents with positive tailwinds for the cannabis industry.
With a strong cash buffer, Sundial has created two primary business segments. The company has its own brand portfolio with a focus on inhalables. Further, the company has investment operations in debt, equity and hybrid instruments.
It’s worth noting that for the first half of 2021, Sundial reported $25.2 million in revenue from investment operations. Currently, the company has investments totaling $350 million.
Additionally, Sundial still has a cash buffer of $885 million. This is likely to be deployed for further acquisition driven growth.
Sundial also has a joint venture with SAF Group. The JV intends to invest globally in cannabis opportunities. In July 2021, Sundial increased the commitment to the joint venture to $538 million.
Overall, the company has ample financial flexibility for organic and acquisition driven growth. Additionally, investments provide a source of steady cash flows. SNDL stock therefore looks attractive for a strong reversal rally.
Borr Drilling (BORR)
BORR stock is another beaten down name among penny stocks that looks attractive following a 41% correction in the last six-months.
Borr Drilling is an offshore drilling contractor. Currently, Borr Drilling has a fleet of 28 premium jack-ups with an average age of four years. Of that number, 13 rigs are operational. The company has been on a slow recovery path after the pandemic impact on revenue and EBITDA.
It’s worth noting that for Q2 2021, the company reported revenue of $54.8 million. For the same period, adjusted EBITDA was $3.7 million. This is the first time since the crisis that Borr Drilling has reported positive EBITDA.
With oil remaining relatively firm around $70 per barrel, it’s likely that contracting activity will remain strong. The company anticipates 23 rigs to be operational by the end of 2022. Additionally, five rigs are scheduled for delivery in 2023.
Therefore, Borr Drilling has a clear growth visibility and the stock looks attractive at 69 cents. I wouldn’t be surprised if the stock doubles in the next few quarters.
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Read More: Penny Stocks — How to Profit Without Getting Scammed
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. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.