Some good news is finally starting to creep into the markets with inflation easing in October. However, GDP growth remains a concern. That’s a key reason why growth-focused penny stocks are trading at depressed valuations.
This is still not a market where investors can aggressively take positions in high beta stocks. Accordingly, I would remain overweight in defensive blue-chip stocks. At the same time, returns need to beat inflation on a consistent basis. For that to happen, it’s important to selectively add growth and penny stocks to one’s portfolio.
I also don’t expect the 2021 penny stock euphoria to be back anytime soon. This does not imply that penny stocks will not deliver positive returns over time. There are plenty of story stocks that can generate 10-bagger returns in the next five years.
The strategy investors may want to think about is screening for non-speculative penny stocks that represent companies with sound business models. Further, with positive industry tailwinds, these stocks can provide the sorts of returns many investors are looking for.
Let’s discuss the factors that make these seven penny stocks attractive right now.
| TLRY | Tilray Brands | $4.19 |
| PSNY | Polestar Automotive | $5.86 |
| RIG | Transocean | $4.45 |
| KGC | Kinross Gold | $4.17 |
| SNDL | SNDL Inc. | $2.68 |
| HRTX | Heron Therapeutics | $3.20 |
| SOLO | Electrameccanica Vehicles | $1.28 |
Tilray Brands (TLRY)
With the U.S. midterm elections providing a shot in the arm for President Joe Biden, there is optimism related to cannabis legalization. Tilray (NASDAQ:TLRY) stock has already seen some positive momentum, with an uptick of 25% in one month. The stock remains undervalued and worth holding for the next few years.
The cannabis company seems to be positioning for big expansion in the U.S. Recently, Tilray acquired Montauk Brewing Company, which will help strengthen the company’s U.S. portfolio, which already includes other strategic investments such as SweetWater Brewing Company. Besides revenue and EBITDA upside, these acquisitions will help in boosting Tilray’s strategic infrastructure.
Tilray has also been reporting encouraging numbers. For the past fiscal year, the company expects to be free cash flow positive in all its operating business units. As the company sees sustained revenue growth, operating leverage will translate into sustained EBITDA margin improvement.
Tilray has a leading market share in medicinal cannabis in Germany. Medicinal cannabis is likely to be a key growth driver for the company in the coming years.
Polestar Automotive (PSNY)
Polestar Automotive (NASDAQ:PSNY) stock trades just above $5. That said, this price level takes into account a surge in PSNY stock of 25% over the last five trading sessions, on the back of strong sales. I think this company is among the penny stocks that’s positioned for multibagger returns in the next five years.
For the first nine months of 2022, Polestar reported revenue of $1.5 billion. For the year, the company has guided for 80% revenue growth on a year-on-year basis to $2.4 billion. Further, the company has reaffirmed its target to deliver 50,000 cars in 2022.
Amidst these strong numbers, the company’s operating losses have continued to swell. A key reason for this is Polestar’s rapid commercial expansion and increased global presence. Accordingly, there’s some cash burn concerns that have dragged this stock lower. That said, I would not be worried about the company’s cash burn right now. That’s because Polestar already has financing support to fund operations through 2023.
It’s also worth noting that the company has its Polestar 4 and 5 models lined-up for commercial deliveries in 2024 and 2025 respectively. This will ensure that the company’s deliveries growth remains strong.
Transocean (RIG)
Transocean (NYSE:RIG) stock seen impressive bullish momentum of late, skyrocketing 50% in one month. However, the stock remains undervalued after a rally from deeply oversold levels.
As an overview, the company is an offshore rig services provider with focus on ultra-deep water and harsh environment rigs. With oil sustaining above $80 per barrel, exploration activity has gained traction. This will continue to benefit Transocean.
For Q3 2022, the company reported a strong EBITDA and revenue beat. Transocean reported drilling revenue of $691 million and an adjusted EBITDA of $245 million.
It’s important to note that the company also reported a contract backlog of $7.3 billion. This provides clear cash flow visibility for the foreseeable future.
Furthermore, for Q3 2022, the company’s order intake was $1.6 billion. If Transocean’s order intake remains robust, the company’s cash flow prospects will continue to swell. I also expect Transocean to report a higher EBITDA margin in 2023 and beyond due to new contracts have come at a higher day rate. Overall, the outlook for this penny stock remains solid.
Kinross Gold (KGC)
With inflation easing, the dollar has weakened on a relative basis. In all probability, gold has bottomed out, making it a great time to consider adding exposure to gold mining stocks. Kinross Gold (NYSE:KGC) looks attractive among many penny stocks in this space.
Kinross reported healthy numbers for Q3 2022 and looks strong from a fundamentals perspective. Even at lower gold prices, Kinross reported operating cash flow of $173.2 million. Further, the company closed Q3 2022 with a total liquidity buffer of $2 billion. This provides Kinross with ample flexibility for dividends, share repurchase and potential acquisitions.
For the current year, gold production is guided to be two million ounces. The company expects to maintain these levels of production through 2025. Therefore, free cash flows will remain high, making this company’s dividend payout relatively safe.
It’s worth noting that Kinross divested assets in Russia and Ghana in 2022 due to geopolitical factors. Production growth is likely if Kinross compensates these divestments with acquisitions over time.
SNDL (SNDL)
SNDL (NASDAQ:SNDL) is another penny stock from the cannabis sector that looks interesting as a long-term bet. SNDL stock has trended higher of late on the back of strong Q3 results. However, that’s not the only reason to be bullish.
In the company’s third quarter, Sundial reported 1,501% year-on-year growth in revenue to $230.5 million. Liquor retail was the biggest revenue contributor followed by cannabis retail. The cannabis company has significantly expanded its retail presence in Canada via acquisitions. This has led to a footprint of more than 350 retail stores across Canada.
At the same time, SNDL is building a long-term portfolio of strategic investments. This includes equity and debt stakes in promising cannabis companies globally. As of Q3 2022, the fair value of the company’s cannabis investments was $653.1 million. As the global cannabis market swells, these investments will likely be value creators for investors. Additionally, the company also has a strong balance sheet to continue pursuing acquisition-driven growth.
Heron Therapeutics (HRTX)
Heron Therapeutics (NASDAQ:HRTX) stock has been trending lower, correcting by approximately 70% over the past 12 months. However, I remain positive on its long-term outlook, given previous approvals handed down by the U.S. Food and Drug Administration (FDA).
Currently, Heron’s portfolio consists of two oncology care drugs and two acute care drugs. The company’s most recent approval (Aponvie) is for the prevention of postoperative nausea and vomiting (PONV).
According to Heron’s estimate, there patients receive a total of 36 million procedures annually that contain some risk of PONV. Therefore, the addressable market for this drug is significant in the United States. It’s widely expected this drug will boost the company’s revenue growth from Q1 2023 onwards.
For the first nine months of 2022, Heron reported revenue of $77.6 million. While the company continues to report operating level losses, the company has also been investing heavily in research and development. With a decent cash buffer of $121.7 million, this is a penny stock with a valuation I think is worth considering.
Electrameccanica Vehicles (SOLO)
Electrameccanica Vehicles (NASDAQ:SOLO) is another interesting name among electric vehicle stocks. The stock has gained some momentum in the recent past, surging 30% in one month. I remain positive on the company’s long term business outlook, and think this surge was warranted.
In terms of business development, Electrameccanica is knocking it out of the park. The company received approval to sell its SOLO EV in Arizona. The company’s single-seat EV is priced attractively, and targeted at the mass market. A base price of $18,500 is all many consumers need to hear.
Additionally, the company is marketing its SOLO EV as a delivery van for restaurants, among other use cases. Any potential significant order on that front could be a key upside catalyst for this stock. The SOLO cargo model also comes with attractive pricing, starting at $24,500.
For Q3 2022, the company reported revenue of only $1.44 million. However, on a year-over-year basis, revenue increased 12-fold. It’s also worth noting that Electrameccanica has an asset-light model. Currently, manufacturing is outsourced, and this has ensured low capital requirements for the company moving forward.
Penny Stocks
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Read More: Penny Stocks — How to Profit Without Getting Scammed
On the date of publication, Faisal Humayun did not hold (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.
