In November 2021, I made an outlandish effort to pick 5 cheap stocks that could double within a month. Few companies rise 100%, and even fewer can do it in the time it takes to properly pickle a cucumber.
Nevertheless, my five-stock portfolio did land winners. Shares of biotech firm Longeveron (NASDAQ:LGVN) would skyrocket 800% that month after receiving a Rare Pediatric Disease (RPD) designation for a key drug. And energy services firm Enservco (NYSE:ENSV) would jump 180% by the following March after Russia’s invasion of Ukraine. On average, the portfolio did double in value, and then some.
Of course, these penny stocks are still laced with risk. My other three picks went nowhere, and plenty of my other Moonshot picks since have done the same. When you’re investing in penny stocks, it’s the average profit that’s the focus, not your hit rate.
And that’s why it’s important to tilt the odds in your favor by focusing on stocks with the fundamental potential to go 2X… 5X… even 10X. These are firms with “special sauce,” often some advanced technology or strong product. Penny stocks face such long odds of success, so we need enormous winners to offset the hundreds of other duds.
Investing in 2023: A Divergence of Winners and Losers
Fortunately, 2023 is shaping up to be a promising year for cheaper stocks. According to data from Thomson Reuters, the median penny stock (defined as stocks trading under $5) now has a forward P/E ratio of only 9.8X, compared to 12X a year ago.
Among cyclical firms, the pattern is even stronger. Energy firms including CONSOL Energy (NYSE:CEIX) and Northern Oil and Gas (NYSE:NOG) now trade for less than 3 times forward earnings. And markets are pricing cyclical consumer stocks such as Beazer Homes (NYSE:BZH) at 3.2X forward P/E. Though earnings estimates may prove too high, investors have far more room for things to go wrong in 2023 than with growth stocks, which are trading at 2019-level valuations.
To narrow down the search for companies that could rise 500% in 2023, I first run my quantitative Profit & Protection system on all stocks below $5. Top scorers are then analyzed from a bottom-up perspective. In the end, two types of stocks emerge.
- Strong Corporate Franchise. Companies with solid underlying performance or valuable brand assets.
- Overlooked Technology. Firms working on “moonshot” technologies with the potential to dominate markets.
Of course, not every firm with these elements will succeed. Storied brands from L’Occitane to Revlon (OTCMKTS:REVRQ) have ended up bankrupt after taking on too much debt. And promising startups like Lidar firm Quanergy (OTCMKTS:QNGYQ) would falter after its moonshot bets failed to pay off.
That’s why investors need to carefully consider these stocks for both their positives and negatives. Although these penny stocks have a better-than-average chance of success, not all, obviously, will perform.
No. 1: Diebold Nixdorf (DBD)
The maker of ATMs and currency processing systems runs a surprisingly stable franchise. The company has generated positive cash flow in all but four years since 1987, and its recent string of losses has more to do with depreciation and amortization charges than with significant operational losses.
Diebold Nixdorf (NYSE:DBD) also has a strong backlog, with 80% of its 2023 product revenue already fulfilled. Diebold’s management plans to ship 60,000 ATMs and 35,000 self-checkout units in the coming year, up from prior-year figures of 52,000 and 25,000 units, respectively. The firm also has growth potential from its self-checkout machine business and electric vehicle charging stations. It could ship as many as 134,000 point-of-sale terminals in 2023.
Of course, DBD shares trade at a significant discount. A decline in the euro’s value shaved off $76.3 million in revenue during Q3 2022. And supply chain issues have dented ATM and other banking revenues. In November, the firm revealed that revenue from its banking products segment declined by a stunning 15.4% in constant-dollar terms from the prior year.
Still, the 84% collapse in Diebold’s stock price in 2022 will likely prove transient. DBD’s sub-$2 shares price the firm at only 1.3X forward earnings, making it one of the cheapest firms on the entire U.S. market. A reversion to more “average” valuations could push shares back into the $10-$15 range.
No. 2: Qurate Retail Group (QRTEA)
Much like Diebold, Qurate Retail Group (NASDAQ:QRTEA) is a cheap firm with a significant business franchise. The firm owns QVC and HSN, the ubiquitous Home Shopping Networks you see on TV at gyms, hospital waiting rooms, and anywhere else requiring background noise. The channel is available in around 99% of all households with cable.
Unsurprisingly, shares of Qurate Retail have taken a beating since 2015, with the stock dropping from over $30 to under $2. A 32% decline in cable subscribers and the rise of e-commerce have turned investors against this once high-flying firm.
Nevertheless, shares of QRTEA have finally become too cheap to ignore. Markets now value the company at only 2.3X forward cash flow, and less than 4X 2024 earnings. Analysts now believe the firm could generate as much as $730 million in 2023 operating earnings — a significant sum for a firm with only a $770 million market capitalization. A 3-stage discounted cash flow (DCF) model also suggests shares are worth as much as $24, even if its cash flow declines at a steady 6% clip beyond 2025.
That said, QRTEA does come with significant risks. First, the firm has around $6.5 billion in long-term loans; its $770 million market capitalization is an equity stub on a mountain of debt. Second, a 2023 recession will almost certainly reduce sales by double digits. Analysts predict that FY 2023 revenues will clock in at $11.4 billion, almost 20% less than 2020 levels. And finally, the firm has struggled to replicate its TV dominance in e-commerce. Gross profit margin has declined by around 200 basis points since 2015.
Still, there is a chance that the company’s low valuation will produce 500% gains or more if a U.S. recovery happens faster than expected. And on balance, it’s a risk that could prove worth taking.
No. 3: Ginkgo Bioworks (DNA)
The Boston-based firm has become a leader in synthetic biology. By genetically modifying organisms such as yeast, Ginkgo Bioworks (NYSE:DNA) has learned to use organisms to create everything from nucleic acid vaccines to flavors and fragrances. And as the company expands work into mammalian cells, its potential only grows.
The stock, of course, still carries the risks of a startup. Analysts expect revenues to drop 19% in 2023 as milestone payments dry up. Operating profits aren’t expected until at least 2025, making an investment in the stock a leap of faith. And investors will have to be comfortable with a firm that — in the eyes of some — is essentially “playing God.”
Still, Ginkgo Bioworks tops the Profit & Protection list of moonshot tech stocks because of its proven revenue streams. The firm generated $194 million from its biosecurity segment alone in the past nine months, and analysts estimate the firm could make up to $550 million in firmwide revenue by 2024. This is not a firm like QuantumScape (NYSE:QS) that relies on a yet-to-be-invented technology.
The company is also well-capitalized. The firm holds $1.3 billion in cash, which will last at least another four years at current burn rates. If risk-taking comes roaring back in 2023, investors can expect Ginkgo Bioworks to trade in the $8-$10 range in short order.
Conclusion: Will 2023 Be a Good Year for Stocks?
2023 will likely prove an uphill battle for certain classes of stocks. Growth stocks remain at 2019-level valuations on a price-to-earnings basis, largely ignoring the end of an easy money period. Mega-cap companies are also looking pricey. Last week, investment bank Morgan Stanley warned that the S&P 500 index (which favors these firms) could fall another 22% if corporate earnings estimates prove too high.
Yet, investors venturing into cheaper stocks will quickly find great deals. These firms have dropped to record low valuations on the fears that the “earnings” part of the price-to-earnings ratios will decline by more than expected in 2023.
In many cases, this has created companies that are ready to rebound. Shares of my three companies will likely do well over the next 12 months, or at least over the next half-decade.
But as always, be sure to spread your bets wide. 500% upsides also come with the risk of total loss. And if my previous moonshot picks were any guide, investors will need plenty of diversification to make sure they don’t lose it all.
On the date of publication, Tom Yeung 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.
