Penny stocks were the talk of the town back in 2021, especially those in the technology and biotech sectors. However, so far in 2023, most penny stocks have remained dormant with barely any price action to the upside. That mostly has to do with rate hikes and funding issues. Investors are rightfully uncomfortable with unprofitable companies, as any debt would now require painful installments, and potentially need to be refinanced at higher rates down the road.
The good news is that inflation is coming down. This is diminishing the rationale for the Federal Reserve to raise rates. Once interest rates fall and the caveats of these companies are taken out of the picture, they have the potential to deliver tremendous gains.
Here are three penny stocks with potential for a rebound despite their current depressed prices. I have excluded biotech companies from this list, but if you want to explore them, I recommend checking out this article too. Let’s dive in!
SurgePays (NASDAQ:SURG) could soon turn around sharply after a year of trading sideways. This fintech company offers wireless services, payment processing, and e-commerce solutions to underbanked customers and businesses. Thus, this company is often likened to the successful Upstart (NASDAQ:UPST) in the fintech industry. I believe a similar recovery is possible with SurgePays.
There are a few reasons why I’m optimistic about this stock. Its retail partners use tablets to provide a range of services and products, which include prepaid wireless plans, gift cards, money transfers, and bill payments. These tablets aren’t cheap, weighing on SurgePays’ cash flow. However, the company recently secured a new line of credit that will allow it to get cheaper tablets and expand faster over time.
The company’s management team anticipates significant scaling ahead, with SurgePays aiming to expand tablet distribution from 13,000 to 25,000 stores over the next year. It grew its revenue by 64% year-over-year in Q1 and expects to ramp up its revenue growth even more moving forward. Accordingly, analysts have pegged the company’s forward revenue growth at 62% for all of 2023. Not too shabby!
Of course, SurgePays is not a company without risks. There is a profitability problem, and there aren’t many banks looking to experiment with lending anymore. As the economic storm clears, significant growth opportunities await in a market of 63+ million underbanked U.S. consumers spending billions on financial services.
Surgepays is a hidden fintech gem with unique value for retailers and consumers. At its current price, it trades at a forward price-to-earnings ratio of just 4.76-times! Accordingly, analysts think it can deliver 144%-plus upside.
Culp (NYSE:CULP) is a textile manufacturer that produces fabrics for mattresses, upholstery, and home accessories. The stock has taken quite the beating since 2016 and now changes hands near its 2001 levels. This is an under-the-radar play that is likely trading near its trough, and could rebound strongly.
Of course, there is a reason for the stock’s slump. Pandemic-induced headwinds worsened the slowdown in the furniture industry. This greatly impacted Culp’s financial performance, and that of its peers. Now, the company shows signs of recovery, exceeding analyst expectations in latest quarter. Culp reported revenue of $61.4 million, up 8% year-over-year, beating analyst estimates by $5.9 million.
The company attributed its improved performance to the strong demand for its mattress fabrics segment, which grew an even more impressive 24.3% over the past year. Looking ahead, analysts do expect this growth to slow down in the next few years, but the company’s valuation remains muted.
Nevertheless, Culp is not out of the woods yet. The company faces near-term challenges due to the furniture industry’s weakness. That said, it has guided for profitability by 2024 and has a strong balance sheet with little debt.
But again, the most compelling aspect here is Culp’s valuation. Culp is a bargain buy at its current price, offering huge upside potential for patient investors. The stock has a market cap of only $64 million, which basically amounts to its quarterly revenue.
The last penny stock on this list is Compass (NYSE:COMP), a real estate technology company that provides an end-to-end platform for agents and homebuyers. The massive 80% drop in COMP stock from its IPO price appears to be due to housing market concerns. That said, it’s not the time to dismiss this stock. I think the company’s strong fundamentals will outweigh near-term risks.
The company’s platform has been well-received by both agents and homebuyers. But again, the real estate market is very shaky, and there are mixed feelings here. Revenue has been sliding for the past year, and quarterly losses have remained steady at $150 million. Analysts project sales to rebound from $5B in 2023 to $6.8B in 2025, with significant FFO recovery.
Of course, I won’t be understating the risks right now. The company faces intense competition and vulnerability to the current housing market cycle. However, I believe these risks are priced in at the current valuation of Compass. The stock has a market cap of only $1.9 billion, which is nearly less than three times its annual revenue.
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Read More: Penny Stocks — How to Profit Without Getting Scammed
On the date of publication, Omor Ibne Ehsan 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.