Last week, tech stocks closed 20% above their recent lows, an astonishingly accurate indicator of new bull markets. With the exception of the 2001 crash, every 20% recovery since 1980 has been met with double-digit returns the following year. A similar boost today would add $9.2 trillion to the stock market
As a percentage, these profits are often magnified among penny stocks. In 2020, car rental firm Hertz (NASDAQ:HTZ) jumped 1,100% after recovering car prices and a takeover bid from Knighthead Capital Management sent shares soaring.
“Hertz could become the top penny stock of 2021,” I wrote a month before the deal. “Bankruptcy proceedings usually leave equity investors with nothing… [but] Hertz might join American Airlines as an exception.”
Penny stocks can also do well without a potential bankruptcy on their books. Shares of Bowflex maker Nautilus (NYSE:NLS) rose 1,900% the same year.
The Power of Penny Stocks
These stunning returns are made possible by ultra-low valuations. At 56 cents, Hertz’s over-the-counter shares valued the car rental firm at less than $100 million — a 99.6% drop from its peak reached in 2014. And at its nadir, Nautilus traded at less than 0.075x price-to-sales (P/S) at its $1.20 price.
Penny stocks are also particularly sensitive to the economic climate. In 2020, shares of companies trading for less than $5 dropped an average of 37%, underperforming companies over $100 by 700 basis points.
That’s why penny stocks are so rewarding in recovering markets. Rising investor confidence, improving financial liquidity and higher risk appetites tend to impact shares of higher-risk stocks more than they do with lower-risk ones. As Federal Reserve policy begins to loosen in 2023 as markets expect, many penny stocks will rebound.
A Word of Warning on Penny Stocks
The massive upside, however, also comes with equally large risks. Many stocks under $1 trade on the OTC (over-the-counter) markets, where reporting standards are more relaxed. Pink sheet companies are not required to provide audited financial reports, and many “shell” companies exist only as financial tools for their owners.
Small market capitalizations can also make these penny stocks a target for market manipulation. In 2020, the former CEO of Bitcoin (BTC-USD) miner Riot Blockchain (NASDAQ:RIOT) settled with the SEC for “lucrative market manipulation,” after running a “classic pump-and-dump scheme” on his company’s shares. And even well-meaning management teams can have their stocks hijacked by market promoters or social media influencers if the company’s float is small enough.
Finally, low trading volume can limit the size of any given investment, even for ordinary investors. Buying up $1,000 of a $1 stock would take two business weeks (10 days) or more if sellers are only parting with 100 shares each day.
Nevertheless, studies have long shown that penny stocks provide abnormal returns beyond what traditional models predict. And for investors looking to ride a wave of investor optimism, penny stocks are one of the best places to put fundamental and quantitative research to work.
A Quantitative Approach to Penny Stock Investing
I’ve written at length on fundamental approaches to penny stock investing. By taking fewer shots on goal, investors can maximize their returns if any single winner emerges.
The strategy does come with significant risks. My No. 1 penny stock pick for 2022, for instance, is down 62% for the year, while my No. 2 pick gained 103%. Investors with insufficient diversification could have lost money this year.
To counter that, my list of 23 penny stocks to buy includes a wide range of companies chosen by my Profit & Protection system. It’s a proven method that has analyzed years of past data to find what works in the markets, and grades companies based on their ability to generate returns over the following 12 months.
The system often picks unintuitive candidates. In May, the system named the struggling Bed, Bath & Beyond (NASDAQ:BBBY) as a “growth” stock for its turnaround potential. BBBY shares would rise 150% soon after. And even near-bankrupt firms like Blue Apron (NYSE:APRN) can earn A+ scores for their potential as a short-squeeze candidate. When a stock borders on zero, the only way it can often go is up.
As markets prepare for a 2023 rebound, here are 23 top penny stocks to buy.
23 Penny Stocks to Buy Before the Market Recovers
Velodyne Lidar (VLDR)
Growth: A+| Value: B| Quality: B+| Momentum: A+| Total: A
Topping my quantitative Profit & Protection list of penny stocks is Velodyne Lidar (NASDAQ:VLDR), a promising San Jose-based autonomous vehicle firm. Shares now trade for under $1 after a brutal selloff in the first half 2022, pricing the company at 1x forward book value.
Analysts are now projecting a stunning 62% growth rate in 2023 and 94% in 2024, pushing Velodyne’s growth score into the A+ range and its average score to an A.
There are some issues, of course, with the company at the fundamental level. Firstly, the company lags behind rival Luminar Technologies (NASDAQ:LAZR) in R&D. Penny stock investors are banking on a No. 2 player. Secondly, my quantitative “quality” score overstates Velodyne’s intrinsic quality; rapid operating earnings growth will still leave the company in the red until at least 2025. And finally, its upcoming merger with rival Ouster (NYSE:OUST) creates near-term M&A risk for investors.
Nevertheless, Velodyne is a promising bet on the future of autonomous driving. If its high quantitative scores are any indication, it’s picks like these that tend to outperform over the next 12 months.
Growth: A| Value: A| Quality: A+| Momentum: A+| Total: A
Skillz (NYSE:SKLZ), the mobile e-sports platform, saw revenues drop 18% in Q2 2022. Shares are down 86% year to date to $1.
“Positioning the company for profitability had a real cost,” admitted co-founder and CEO Andrew Paradise in the company’s Q2 call. “Revenue after engagement marketing, paying monthly active users, all fell sequentially quarter-over-quarter.”
But the company’s renewed focus on profitability has helped the firm in other ways. The company reduced its net loss by almost $90 million that quarter, and closed loopholes of user cheating. Wall Street analysts now expect that revenues at the San Francisco-based firm will stabilize at $262 million in 2023 and rise above $300 million the following year.
These factors have helped push Skillz’s Profit & Protection scores solidly into the A range. Seven of the 11 analysts covering Skillz now have target prices that imply potential gains of 40% or higher. Though Skillz’ share price has turned the promising gaming firm into a penny stock, quantitative research has shown that such firms can come roaring back.
Growth: A+| Value: A+| Quality: A+| Momentum: A+| Total: A+
The discount e-commerce firm RealReal (NASDAQ:REAL) has one of the highest Profit & Protection scores possible. And not without good reason.
“The luxury apparel resale space has been chronically underserved,” notes Morningstar analyst Sean Dunlop. “The RealReal’s business model exists to serve this end market more efficiently… We view the firm’s strategy as sound and believe that ongoing investments in fulfillment efficiency, brick-and-mortar stores, and diversified supply sourcing represent a solid roadmap toward profitability and (potentially) excess returns.”
Analysts have good reasons to remain bullish. RealReal follows in the footsteps of other successful discounters (Gilt Groupe, RueLaLa) and adds additional barriers to entry with a network of thousands of consignor buyers. Rapidly improving returns help drive the e-commerce’s “quality” score to an A+.
RealReal also earns an A+ for growth. Analysts are expecting a 34% revenue growth rate in 2022, followed by 21% in 2023 and 26% in 2024, according to Thomson Reuters I/B/E/S estimates.
As the U.S. economy recovers from its recessionary slump, revenues and earnings at the Real Real should increase. Wall Street expects revenues to rise 20% in 2023 to $755, and for the firm to break even on an EBITDA basis the year after. And at under $1.50, the true bargain might be RealReal’s shares.
Growth: A+| Value: A| Quality: B+| Momentum: A+| Total: A+
AppHarvest (NASDAQ:APPH) is one of the fastest-growing food production firms in America. The company expects to have 165 acres of high-value greenhouse space by the end of 2022, which should generate almost $100 million in revenue next year. AppHarvest could earn as much as a 25% gross margin on goods, according to Wall Street analysts, earning the company a solid B+ quality score.
The Appalachian-based firm is a leader in large greenhouse operations. Its 60-acre Morehead CEA greenhouse is one of the world’s largest and uses around 90% less water than traditional open-field production.
Shares of the firm, however, have been battered by controversy. Activists have filed lawsuits, alleging misleading press releases and presentations; the involvement of polarizing politician J. D. Vance has further increased scrutiny of the firm.
Still, these low prices award AppHarvest an A grade for value. The company now trades for book value, reducing the potential downside for investors. And an improved harvest in 2023 could surprise markets to the upside. Though AppHarvest remains a highly speculative penny stock, the Profit & Protection system has flagged shares as a potential growth and turnaround firm.
Aeva Technologies Inc (AEVA)
Growth: A+| Value: A| Quality: B+| Momentum: A+| Total: A
Rumors have long swirled that the Aeva (NYSE:AEVA), a laser-sensor startup, could eventually help Apple (NASDAQ:AAPL) create its first Apple car. The small firm was founded by two ex-Apple engineers, one of which helped develop the Apple Watch.
Aeva has already received strategic investments from Porsche (OTCMKTS:POAHY) and management believes they could generate revenue from series production by 2024. Wall Street analysts agree, giving Aeva a $215 million revenue target for that year. Its growth score stands at an excellent A+.
The Mountain View, California-based firm has plenty of hurdles. Its sagging share price and a $235 million cash burn in the past year give it limited scope to fundraise. And its $380 million cash pile could run out by mid-2024 if the firm misses revenue projections. The firm only earns a B+ in quality for these reasons and more.
Still, penny stock investors have good reason to expect Aeva to succeed, or at least get acquired by a larger firm. Aeva focuses on the software end of lidar, an often overlooked area of laser sensors. And its $400 market capitalization makes it possible for would-be acquirers to swallow.
Workhorse Group (WKHS)
Growth: A+| Value: A| Quality: B+| Momentum: A| Total: A
In August, California green-lighted legislation that would ban all new gas-powered vehicle sales by 2035. Many states like Massachusetts have trigger laws that will follow the Golden State’s lead.
That’s creating a windfall for electric vehicle makers, including electric truck maker Workhorse Group (NASDAQ:WKHS).
Since ejecting its former CEO Steve Burns in 2021, Workhorse’s management has focused on turning the company around.
“We are gaining commercial momentum,” CEO Richard Dauch said in the company’s Q2 2022 earnings call. “Make no mistake, Workhorse is a fundamentally different company today than it was a year ago.” The company now has a full medium-duty EV portfolio and has secured a significant purchase order for commercial vehicles.
Analysts now expect Workhorse to generate $127 million in revenue for 2023 and $325 million for 2024, up from only $18 million in 2022. These factors award Workhorse an A+ in growth and an A grade overall.
The company’s beaten-down shares could be next to rise. WHKS trades at under $2.70 despite having zero debt.
FuelCell Energy (FCEL)
Growth: A+| Value: A| Quality: A+| Momentum: A+| Total: A+
In many ways, FuelCell Energy (NASDAQ:FCEL) was the poster child of 2021 speculation. Company shares rose from $2 to $26 in a frenzy over green technologies. For a brief moment in time, hydrogen seemed to be the next frontier in new-age energy.
Shares would eventually fall back to $3 after the company failed to meet Wall Street’s lofty expectations…
…But look under the hood, and the firm is still growing.
The company is on track to generate $134 million in revenue this year, up 93% from the year before. And at current rates, the firm could break even in 2025. The firm earns an A+ for growth from my quantitative Profit & Protection system.
Energy shortages in Europe have also reignited interest in green hydrogen. Multiple deals are now in the works to supply northern Europe with millions of tons of hydrogen derived from renewable energy. Rising profitability gives FCEL an A+ for quality.
That puts FuelCell in a strong position. Analysts now expect the firm to grow an average of 28% through 2024. And if the company reaches these targets, investors should expect its shares to recover in short order.
Growth: A-| Value: A+| Quality: A+| Momentum: A+| Total: A+
8×8 (NYSE:EGHT) is an unusual penny stock for its profitability. The provider of voice, team chat and other online communication tools has seen EBIT grow from a $60.88 million loss in 2020 to an expected $32 million this year, earning itself an A+ for quality. Wall Street analysts are expecting another 59% boost in operating profits next year as more firms adopt permanent remote work policies.
The Campbell, California-based firm is also relatively established, with 2.5 million paid business customers using its services. (Though this lowers its growth score slightly to an A-). Its gross profit margin comes in at a healthy 67%.
None of this has helped 8×8’s stock price. Shares have fallen from $35 into the $3.50 range, mirroring similar losses at rival cloud communication providers Zoom Video Communications (NASDAQ:ZM) and Twilio (NYSE:TWLO).
Nevertheless, 8×8 remains a high-potential bet on a profitable firm, according to its Profit & Protection scores. Shares trade at mild 14x forward price-to-earnings (P/E), making this overall A+ penny stock one of the best values on Wall Street today.
Latham Group (SWIM)
Growth: B+| Value: A+| Quality: B-| Momentum: A+| Total: A-
Latham Group (NASDAQ:SWIM) is the largest designer, producer and marketer of in-ground residential swimming pools in North America. It’s also one of Wall Street’s cheapest deep-value stocks. At $4.50, SWIM trades at 6.2x P/E and under 5x price-to-cashflow, earning an A+ in value.
These low valuations are a product of an unusually heavy debt load. The firm holds $263 million in long-term debt from a private equity deal in 2015, and interest payments have consumed at least 45% of operating income every year. No matter how much cash flow Latham Group produces, much of it goes back into creditor hands. Its quality is firmly in the B- range.
That could change in 2023 and beyond as the firm continues to grow and pay down debt. In his Q2 earnings call, CFO Robert Masson gave updated guidance of 19% to 22% topline year-over-year growth. Price momentum is also working in Latham’s favor, according to the Profit & Protection system. Though it won’t be a smooth ride up, Latham remains one of the system’s top penny stock picks to watch as a turnaround play.
WW International (WW)
Growth: A-| Value: A+| Quality: A| Momentum: A+| Total: A
Shares of the New York-based wellness company WW International (NASDAQ:WW) have admittedly yo-yoed like a diet gone bad. Shares ballooned from $4 to over $100 between 2015 and 2018 after TV personality Oprah Winfrey bought a significant stake…
…only to drop back to $4.50 again four years later.
Today, the company formerly known as Weight Watchers has become a top penny stock for its cheap share price, high quality and turnaround-like momentum.
First, WW International scores an A+ in value for its absurdly low 3.2x price-to-cashflow ratio. It’s one of the cheapest companies on the stock market by that metric.
Next, there’s quality, where WW scores an A. The firm has managed to remain profitable every year since 1997, an achievement that few penny stocks can claim.
Finally, there’s momentum. WW shares have fallen 53% in the past six months and are down 73% year to date. The Profit & Protection system has shown that such negative price momentum is often followed by a large bounce.
Though WW International has allowed its overheads to bloat over the years, shares remain attractive at $4.50, especially if cost-cutting measures (belt-tightening, anyone?) begin to work.
Consolidated Communications (CNSL)
Growth: A| Value: A+| Quality: B-| Momentum: C| Total: B+
Consolidated Communications Holding (NASDAQ:CNSL), the broadband provider, has struggled with a high debt load. The company generated $118 million operating income in FY2021, only to post a $100 million net loss after counting interest and other non-operating charges. Company shares trade at 0.5x price-to-sales, around a less than a fifth of rival Charter Communications (NASDAQ:CHTR).
Ordinarily, most investors would pass over CNSL as a has-been player in a slow-growth market. But the quantitative Profit & Protection stock-picking system is predicting a turnaround. Analysts expect that cost-cutting will help the company stem losses to $24 million this year — a marked improvement from 2021. And the firm’s $1.025 billion of net assets provides some downside; the firm could theoretically sell its assets to a larger competitor if cash gets tight.
Though the company’s momentum is pointing to a tough year ahead, patient investors will find it worthwhile to keep CNSL on their radar for when prices begin to tick back up. The firm’s A+ value is too cheap to pass up.
Virgin Galactic (SPCE)
Growth: A+| Value: A| Quality: B- | Momentum: A+| Total: A-
Richard Branson’s Virgin Galactic (NYSE:SPCE) is an unusual firm to find in the penny stock bargain bin. The company went public in one of the first blockbuster SPAC deals on Wall Street, raising $674 million in the process. Shares of the space tourism company would go on to trade as high as $55 in the frothy 2021 market.
Today, Virgin Galactic’s $5 price tag has made it attractive to the quantitative Profit & Protection system. Analysts still believe the company could generate as much as $350 million in revenue by 2026, according to surveys by Thomson Reuters, giving the firm an A+ growth grade. And SPCE’s negative momentum indicates a firm that could rebound over a value-driven turnaround. Though SPCE remains risky for its low quality, my Profit & Protection system is beginning to label the space travel firm as a potential turnaround to ride.
Growth: A-| Value: A+| Quality: B| Momentum: A+| Total: A-
If you’ve ever wanted to know what a Warren Buffett “cigar-butt” company looks like, Harsco (NYSE:HSC) is about as close as you can get. The waste management firm helps industrial companies recycle metal, manage scrap and process waste before it goes into landfills. Not exactly a high-growth industry at first glance.
The company’s declining quality has also weighed down its quantitative scores. Pre-tax profits have fallen from a $113 million peak in 2018 to $37.5 million in 2021 on higher overhead costs and declining margins. The company only scores a moderate B in quality
But the same forces have also pushed Harsco’s shares into deep value territory. At under $6, HSC shares now value the company at around 0.5x price-to-book and earns a solid A+ grade for value. And growth isn’t a lost cause either. Wall Street analysts are projecting a return to operating income growth by 2023 as industrial output picks back up. Harsco earns an A- for growth.
Together these factors suggest that investors should still consider this beaten-down penny stock as the market rebounds.
Mistras Group (MG)
Growth: A-| Value: A+| Quality: B+| Momentum: C| Total: A-
The New Jersey-based Mistras Group (NYSE:MG) scores relatively well on the Profit & Protection system, earning an A- overall for its high value and quality.
The energy service company operates an asset protection system, which helps energy, manufacturing and power firms inspect pipelines and other essential assets. It’s a cyclical business that saw declines in 2016 and 2020. Its quality lags at a B+ grade for that reason.
A boom in U.S. energy, however, is quickly pushing the industry back into a boom. Wall Street analysts now expect Mistras to generate $800 million in revenue by 2024, a significant increase from the $677 million generated in 2021. Earnings could double to $14.4 million next year, earning Mistras Group an A-for growth. The firm also trades at an excellent 12.8x P/E ratio, earning an A+ for value.
These figures have helped award Mistras Group an overall score of A-. If energy prices rebound as many analysts expect, Mistras Group could see its momentum score follow upwards in short order.
SoFi Technologies (SOFI)
Growth: A+| Value: B+| Quality: A+| Momentum: A| Total: A
InvestorPlace analyst Luke Lango has long pounded the table on SoFi Technologies (NASDAQ:SOFI), a highly promising fintech.
“SoFi stock has been absolutely crushed over the past year… But as the old saying goes, it’s always darkest before the dawn. By 2030, it’ll rise around 25X from current levels.”
Now, the Profit & Protection system has also flagged SOFI as a top pick. Net interest income is expected to double in 2022 to $515 million, and increase to $842 million by 2024 as rates continue to rise. And analysts are now projecting positive operating income by 2024. These factors help award SoFi a solid A+ for growth.
SoFi also has some surprising quality behind the numbers. The company has aggressively grown to become an “Amazon of finance” by cutting deals with existing providers of everything from financial planning to insurance products. The firm could legitimately become worth multiples of its current $5.20 penny stock price.
There are some concerns, of course. The company scores an average B+ in its value score for a relatively rich price. And the quantitative Profit & Protection system misses much of SoFi’s bank risk, since such figures don’t show up in financials until it’s far too late.
Still, SoFi remains a top penny stock for its massive growth runway, strong turnaround momentum and the potential to bring online banking to the masses once and for all. Don’t expect SoFi to languish at $5 forever.
Bed Bath & Beyond (BBBY)
Growth: A| Value: A+| Quality: B-| Momentum: A+| Total: A-
In May, the Profit & Protection system flagged home goods retailer Bed Bath & Beyond as a promising turnaround play. Shares had become so cheap that the only direction the meme stock could go was up.
Shares would rise 150% within two months.
Today, a new slump in BBBY shares provides a second chance for risk-seeking investors. Markets price the lossmaking firm at 0.2x sales, and the company’s negative momentum is setting up the stock for a short-term bounce. It’s a typical turnaround play that the Profit & Protection system loves to flag.
None of this means that Bed Bath & Beyond will succeed in the long run. The company scores a B- in quality, and analysts expect the firm will keep generating losses through FY2025. But historically, near-bankrupt firms from Sears (OTCMKTS:SHLDQ) to JC Penney provided plenty of opportunities for speculation before they finally went under for good.
Altice USA (ATUS)
Growth: C| Value: A+| Quality: A| Momentum: A+| Total: B+
Altice USA’s (NYSE:ATUS) growth score of C should immediately warn investors. The NYC-based cable television provider is expected to see revenues decrease by 4% next year as more consumers cut cords. Net income could drop as much as 11% to $565 million, a 43% decline from 2021 levels.
Yet, ATUS provides a compelling penny stock investment for its steady cash flows and low share price. Analysts expect the firm to generate almost $500 million in free cash flow next year, pricing the stock at an astonishing 5.7X price-to-free-cashflow (P/FCF). The firm earns an A+ for value.
The company’s price momentum also shares elements of other turnaround plays. The stock has declined 55% over the past six months to $4.70, and stabilized in October. Such patterns are indicative of a near-term bounce.
Altice is far from a growth company. But experienced investors in other deep-value penny stocks will immediately recognize the potential for making quick cash.
Sabre Corp (SABR)
Growth: A+| Value: A+| Quality: A+| Momentum: B+| Total: A+
Sabre (NASDAQ:SABR) is one of the four major Global Distribution Systems, centralized databases of airline and hotel bookings. It’s an oligopolistic business that’s helped Sabre, Amadeus and Travelport generate years of profitable growth.
The Covid-19 pandemic upended that notion. Sabre lost $1 billion in 2020 and another $677 million in 2021, sending its richly valued shares into penny stock territory. Today, shares change hands for less than $5.
But the Profit & Protection system is starting to see a turnaround for Sabre and its GDS peers. Wall Street analysts are now projecting a 55% increase in 2022 revenue and another 26% for next year. Operating earnings are expected to turn positive again in 2023, earning Sabre an A+ for both growth and quality.
Signs are already emerging that air travel demand is back on the rise. In October, United Airlines (NASDAQ:UAL) noted that “consumer appetite for travel is showing no signs of slowing down despite high airfares and concerns about the economy.” Shares would jump 7% on the news.
As travelers take back to the skies, Sabre and other GDS firms stand to benefit. Don’t expect Sabre to remain a penny stock for long.
Sirius XM Holdings (SIRI)
Growth: B+| Value: B| Quality: A+| Momentum: B+| Total: B+
The high-quality Sirius XM Holdings is a “safer” play for penny stock investors. The company earns a high A+ in quality for its abnormally large profit margins, but scores lower in growth, value and momentum.
A closer look under the hood shows why. Revenues are expected to grow between 3%-4% through 2024, and net income ~5% despite its 2019 acquisition of Pandora. It’s a metronome, not a meteor, when it comes to growth thanks to management’s “slow-and-steady” approach.
Similarly, Sirius XM isn’t particularly cheap. Shares trade at 20x P/E, well within striking distance of rival Apple. It’s priced as a tech company, not as a telecom.
Still, the stock represents a relatively safe way for investors to buy into penny stocks. Sirius’ management has remained relatively disciplined in capital expenditure and has consistently bought back shares with free cash flow. SIRI won’t be the most exciting penny stock to buy, but it’s certainly a safer bet, according to its Profit & Protection scores.
Turtle Beach (HEAR)
Growth: A| Value: A+| Quality: B+| Momentum: A+| Total: A+
Turtle Beach (NASDAQ:HEAR), the California-based gaming headphone firm, is about as cyclical as they come. Shares peaked at over $80 in 2013 before dropping to $2 by 2017…
…Rose to $27 in 2018 and dropped to $5 in 2020…
…Rose to $33 in 2021 before…
Well, you get the idea. Turtle Beach is a fashion company masquerading as a gaming firm. The company only earns a B+ for its gyrating quality.
Yet, HEAR is offering another chance for investors to jump back in. Shares trade at $8, and the $100 million firm now earns an A+ for momentum after its recent stabilization.
Analysts also remain bullish about this cyclical firm. Revenues are expected to recover to $325 million next year, a 19% year-over-year increase while operating income should hit $15 million. Turtle Beach consequently earns an A grade for growth.
That makes Turtle Beach a solid turnaround play, according to its quantitative scores. Much like Bed, Bath & Beyond, this cyclical firm could still have more left to give.
Growth: A-| Value: A+| Quality: A-| Momentum: A+| Total: A
Shares of the e-commerce firm 1-800-Flowers.com (NASDAQ:FLWS) collapsed in 2022 over rising overhead costs and compressing margins. FY2022 operating earnings came in at $45 million, down from $152 million the year before. Its quality score has fallen to an A-
Yet, declining stock prices have pushed the 46-year-old firm into the A+ value territory. Shares now trade at 0.21x price-to-sales (P/S), a 66% discount to its 0.6x long-run average. And a 7x EV/EBITDA ratio puts the firm in a similar league to brick-and-mortar companies like Sally Beauty Holdings (NYSE:SBH).
These prices make little sense. 1-800-Flowers.com is a capital-light firm with relatively few retail locations; a 3-stage discounted cash flow model (DCF) suggests a justified value closer to $14, not $8.
Markets are beginning to agree. Prices of FLWS are up almost 35% in the past month after falling 70% this year — a pattern that suggests a momentum breakout could soon follow.
Under Armour (UAA)
Growth: A-| Value: A+| Quality: B+| Momentum: A+| Total: A
Shares of Under Armour (NYSE:UAA) have been on a rollercoaster ride since 2014, reaching peaks in 2015, 2019 and 2021, while seeing troughs in 2017, 2020 and 2022. Such volatility dents the firm’s growth and quality scores. Industry-wide issues with supply chain and inventory levels have compounded UAA stock’s retreat from its $27 high this year to $8 today.
Under Armour has also fallen behind its competitors in product innovation, instead choosing to pursue the lower-end market. 90% of its North American locations are off-price, according to research by Morningstar analysts.
Nevertheless, shares have finally become too cheap for my quant system to ignore. UAA shares trade at 1.75x price-to-sales, less than half of Nike’s (NYSE:NKE) value. And a slight share price recovery in October after a massive H1 fall gives the firm an A+ for momentum.
Analysts are also beginning to reverse course on negative estimates. Revenues are now expected to grow in the mid-single digits through 2025. All this points to a potential turnaround for the Maryland-based firm. Though Under Armour will continue on its rollercoaster ride, signs are mounting that it’s now reached a bottom.
Growth: A+| Value: A+| Quality: A| Momentum: B+| Total: A
Finally, New York-based Jet Blue (NASDAQ:JBLU) rounds out the list of well-rated stocks under the Profit & Protection system.
The company is a growth powerhouse, with 2022 revenues expected to rise 52% on increased travel demand and a merger with Spirit Airlines. Analysts expect operating income to move from a $913 million loss in 2021 to a $405 million gain by 2023. The airline earns a stunning A+ for growth.
JetBlue’s valuation is also compelling. After falling 45% this year to $8, the airline’s shares now trade at a 0.27x price-to-sales. Of its rivals, only American Airlines (NASDAQ:AAL) trades cheaper by that metric.
The result: a travel stock with the potential for 100% gains. In mid-October shares of rival United Airlines rose more than 7% after its CEO noted how “consumer appetite for travel is showing no signs of slowing down.” And with oil prices moderating since last summer, shares of JetBlue could have plenty of room for takeoff in the next bull market.
Conclusion: When to Buy Penny Stocks?
Penny stocks represent some of the highest-risk companies that investors can buy. Not only did shares of under-$5 stocks perform worse than those over $100 during the 2020 market crash. Their volatility is consistently three times higher even in good times, according to data from Thomson Reuters.
That makes market timing particularly essential for these low-priced stocks.
Today, signs are emerging that the U.S. stock market is beginning to bottom out. Last Wednesday, Fed Chair Jerome Powell noted that the pace of rate hikes will slow “eventually.” And a relatively tight labor market shows that the U.S. might have avoided a deep recession this time around.
It’s never easy to buy penny stocks at the bottom of the market. But concentrating on stocks with certain characteristics will help set investors up for a far better chance at penny stock success.
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, Tom Yeung 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.