- These penny stocks present an opportunity to pick up some bargains after the steep sell-off in early May.
- Canaan (CAN): The high-performance computing solutions provider could bounce with a recovery in the crypto market.
- Pitney Bowes (PBI): A penny stock that offers a dividend yield of more than 4% and a strengthening balance sheet.
- Telefónica (TEF): A telecommunications services company in Europe and Latin America with a dividend yield of more than 8%.
- X Financial (XYF): A Chinese financial firm that turned profitable in 2021 with an impressive 75% revenue growth.
- Charles & Colvard (CTHR): A fine jewelry company that announced a $5 million buyback program.
- Companhia Siderurgica Nacional (SID): A steel producer in Brazil with a surging sales growth and a dividend yield of more than 10%.
- Destination XL Group (DXLG): A specialty retailer with an impressive free cash flow growth of more than 2,900% in the fiscal year 2022.
The U.S. stock market started May 2022 on weak momentum. There were a couple of strong selloffs after investors evaluated the implications of the tighter monetary policy set by the Federal Reserve to fight high inflation. Many people may feel now is a bad time to look for penny stocks to buy, but if you’re smart with your picks, this could be an excellent time.
Penny stocks are generally considered shares of small companies that trade for less than $5 per share. If a rebound is to occur, then penny stocks could benefit from their extremely low prices, as the adage “buy low sell high” will increase the chances of recovery.
When it comes to these smaller names, people ask, can you make money on a penny stock? Or are penny stocks good to buy? The answer to both of these questions is yes. Sure, penny stocks are considered to have greater risk than other, more established stocks. But with great risk comes a potentially high return … as long fundamental analysis has been applied.
In this article, our most interesting penny stocks to buy are chosen based not only on their low stock price but also on being profitable or having turned profitable in the past year.
So now, what are my top penny stocks to buy? There are no guarantees, but these seven picks now present high odds for recovery should the selloff in the broader stock market lose momentum.
|CTHR||Charles & Colvard||$1.38|
|SID||Companhia Siderurgica Nacional||$3.53|
|DXLG||Destination XL Group||$4.36|
The first of our penny stocks to buy is Canaan (NASDAQ:CAN), a Chinese company that designs chips aimed at supporting blockchain technology and bitcoin mining. It has a price-earnings ratio (for the trailing 12 months, or TTM) of 1.7 and a one-year target of $14.83. Compared to Friday’s closing stock price of $3.09, that represents a potential return of 381%.
Shares of Canaan have losses of around 40% in 2022, and there could be more volatility ahead as the firm will announce its first-quarter 2022 results on May 19.
A recovery in the cryptocurrency market — which has also witnessed a steep selloff in tandem with the stock market — should also be supportive for Canaan. In 2021 its sales growth of 1,092% was explosive, as was the profitability as net income surged by 1,095%. Diluted EPS grew to $1.81 in 2021 compared to -20 cents in 2020.
A third positive factor is the tremendous growth of free cash flow. FCF surged 2,765% in 2021 to $222.6 million. A stock rally until the earnings release on May 19 could occur.
Pitney Bowes (PBI)
Pitney Bowes (NYSE:PBI) is a global shipping and mailing company that provides technology, logistics and financial services in the U.S. and internationally. It has a dividend yield of 4.4% at its Friday closing stock price of $4.55. Having an attractive dividend yield is encouraging as it can enhance the total return in a potential rally.
The P/E ratio (TTM) of 15.2 is relatively low and the one-year target of $7, if achieved, would represent a return of 54%, which is very good.
First-quarter 2022 financial results were strong as Marc B. Lautenbach, president and CEO of Pitney Bowes, stated “We saw substantial margin expansion in our Global Ecommerce business and excellent execution in our SendTech and Presort businesses. Importantly, Global Ecommerce recorded its highest quarterly gross margin ever and SendTech and Presort, in aggregate, once again grew top line in the first quarter.”
Furthermore, the firm strengthened its balance sheet by reducing debt by $99 million during the quarter. The firm has unfortunately been inconsistent with profitability over the past five years, reporting a net loss in 2020. But on the other hand, it is consistently generating positive free cash flow, which is bullish.
Telefónica (NYSE:TEF) is a telecommunications services company in Europe and Latin America that has a P/E ratio (TTM) of 3.4 and a dividend yield of 8.2% as its Friday close at $4.92.
Who says that penny stocks cannot offer high dividend yields to compensate for their risk? This is now our second of these penny stocks to buy with an attractive yield. Putting labels in stock investing is not always wise.
The one-year target for Telefónica stock is $6.46. The company is expected to have EPS growth in the next three to five years of 15.87%.
This puts Telefónica in lists of both stocks that are expected to have strong growth and those that provide passive income generation. The revenue growth does not impress, but profitability does, as it is consistent and has increased 492.34% in 2021 to $7.88 billion. EPS diluted of $1.37 grew 466% in 2021, compared to EPS diluted of 24 cents in 2020.
X Financial (XYF)
X Financial (NYSE:XYF) is a Chinese company providing personal financial services such as credit loans, housing loans, and investment and insurance products. Shares of X Financial have moderate losses of approximately 16% year-to-date, and 2021 seems to be an inflection point as the firm reported a sales growth of 76% to $562.3 million. It also turned profitable again, as in 2020 it had reported a net loss of $189.58 million.
In 2021 X Financial reported a net income of $127.98 million, a growth of 167.5%. The Q4 2021 and full-year unaudited financial results were strong, showing a year-over-increase of 15% to 823.4 million yuan from 716.3 million yuan for the quarter.
The full-year income from operations in 2021 was 1,311.0 million yuan compared to a loss from operations of 1,430.3 million yuan in 2020. Operating income is essential in most cases to support a positive net income.
Charles & Colvard (CTHR)
Charles & Colvard (NASDAQ:CTHR) is a fine jewelry company that has witnessed a loss of nearly 52% for its shares in 2022. The P/E ratio (TTM) of 3.9 is too low and the one-year target price of $2 represents a potential upside of 45%.
The firm reported its Q3 FY2022 results on May 5, showing strength in sales. There was a 22% increase in charlesandcolvard.com revenue year-over-year, but the big news was the announcement of a $5 million stock buyback program.
In general share buybacks by companies are positive, as they reflect optimism in the business prospects and many times signal that the management considers its shares to be undervalued. In 2021 net income growth and revenue growth were 307.9% and 34.4% respectively.
Companhia Siderurgica Nacional (SID)
The dividend yield of 11.5% is very attractive and can add a safety net to the stock price that closed at $3.53 on Friday. On the upside, the one-year target of $4.65 signals an upside potential of nearly 32%.
The expected three-to-five-year EPS growth of 3.21% is not bad.
Some other factors to love about SID stock are the consistent sales growth that was 10.74%, 18.19%, and 59.37% in 2019, 2020, and 2021 respectively. Profitability is also very strong, with net income growth of 223% to $12.26 billion in 2021.
The firm is generating consistent positive free cash flow too. So, I consider it not to be a value trap stock but a deep-value penny stock now.
Destination XL Group (DXLG)
Destination XL Group (NASDAQ:DXLG) is a specialty retailer of big and tall men’s clothing and shoes in the United States and Canada. The stock has a P/E ratio (TTM) of 5.3 and a one-year target of $10.
Having a closing price of $4.36 on Friday, shares of Destination XL Group have losses of nearly 23% in 2022. Is there a bargain to be had here now?
The firm will announce its Q1 2022 financial results on May 26, so expect volatility on that day.
Meanwhile, this retailer has done many things right in terms of key metrics for the fiscal year 2022. Revenue increased 58.34% to $505.02 million; the company turned profitable, reporting net income of $56.71 million after a series of net losses for fiscal years 2018-2021; and free cash flow increased to $85.23 million.
Another positive factor is the surge of 7,367.00% in FY 2022 for net operating cash flow to $90.5 million. The company generated a lot of cash from its normal business operations, and that is great news.
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On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.