In today’s volatile market, many investors are searching for opportunities to find exponential returns. Though risky, penny stocks can offer just that – impressive upside potential of 1,000% or more.
Admittedly, penny stocks generally have a poor reputation for being speculative and unpredictable. Many are. However, with the right research and due diligence, it’s possible to find diamonds in the rough with strong fundamentals and catalysts that position them poised for a major turnaround. I contend that now is a great time to identify these promising penny stocks before they leave penny stock territory for good.
While broader market uncertainty persists, the valuations of many penny stocks remain depressed and disconnected from their potential. Once the tide turns, these overlooked stocks could rapidly gain traction. Though some may continue facing headwinds in the near term, their long-term growth prospects make them compelling investments, in my view.
To be clear, penny stocks are not for the faint of heart. Expect continued volatility ahead. However, for investors with patience and risk tolerance, I believe the long-term upside of these seven penny stocks dwarfs their downside risk.
Lesaka Technologies (LSAK)
Lesaka Technologies (NASDAQ:LSAK) has been flying under the radar for some time now, but this rapidly-growing South African fintech company is on the verge of sliding out of penny stock territory. With strong double-digit revenue growth, improving profitability, and massive headroom for growth, the upside potential for this company appears to be endless.
Naturally, as a foreign company operating in South Africa, Lesaka trades at a discount to U.S. fintech peers. However, in my view, the valuation disconnect has become excessive. Currently, LSAK stock trades at just 0.5-times forward revenue and 15-times 2028 earnings, multiples that seriously undervalue its earnings growth potential.
South Africa undoubtedly faces challenges, whether it’s load shedding, high interest rates, or inflationary pressures on consumers. However, Lesaka has proven resilient through these headwinds, delivering 9.3% revenue growth and 25% earnings per share growth in its latest quarter.
As macro conditions ultimately improve, Lesaka is poised to capitalize on secular tailwinds in African fintech. Financial inclusion remains low across the continent, providing ample growth runway. From what I can see, Lesaka is establishing itself as the leading financial platform for the underserved. That’s because, on the consumer side, Lesaka’s focus on low-income and social grant beneficiaries provides a captive base to cross-sell products like micro loans, micro insurance, and value-added services. After years of turnaround efforts, the consumer segment has now delivered three straight quarters of “segment-adjusted EBITDA.”
While risks remain, Lesaka has put the worst behind it. Sustained losses have turned into consistent profits, interest expenses are declining as debts get repaid, and non-core asset sales should further strengthen the balance sheet. This stock is a buy in my book.
Ammo Inc (POWW)
Recent geopolitical turmoil and global instability have put ammunition manufacturers like Ammo Inc (NASDAQ:POWW) in the spotlight. With military stockpiles depleted and governments urgently increasing weapons production, demand for ammunition and ammunition backlogs are surging worldwide.
In my opinion, even if the Russia-Ukraine conflict ended tomorrow, ammunition demand would remain robust for years. Restoring inventory levels after years of drawdowns will be a prolonged endeavor. With allies urgently replenishing arms, the tailwinds for U.S. ammunition producers won’t disappear anytime soon. Plus, manufacturing larger caliber brass casings also provides higher margins than the commercial ammunition market.
Ammo Inc. has leaned into this opportunity, pivoting its production mix toward more profitable OEM brass casing sales and away from lower-margin commercial ammunition. While this strategic shift impacted the company’s latest quarterly results, reducing revenue and earnings, it has dramatically strengthened Ammo Inc.’s margin profile.
Gross margins jumped from 27% to 41% year-over-year in the company’s latest quarter. As OEM casing sales become a larger mix of revenue, Ammo Inc.’s profitability should continue improving. With the company no longer reporting its backlog due to national security concerns, one can presume its order book remains substantial for the foreseeable future.
Meanwhile, Ammo Inc. maintains its dominant position in online ammunition sales through its gunbroker.com platform. While consumer demand has softened lately, gunbroker.com offers huge cross-selling potential as POWW rolls out new services like payment processing and accessories. Management expects these initiatives to eventually double gunbroker.com’s margins.
As vehicles age, drivers tend to spend more on maintenance and repairs to keep their cars running smoothly. With the average U.S. vehicle now over 12.5 years old and creeping higher, this trend provides an underappreciated tailwind for auto parts retailers like CarParts.com (NASDAQ:PRTS).
Offering a wide selection of replacement parts and accessories, CarParts.com caters perfectly to do-it-yourselfers working on their aging vehicles. The company’s intuitive digital platform and excellent customer service keep drivers coming back for more. Approximately one-third of CarParts.com’s e-commerce revenue already comes from repeat purchasers.
While consumers have tightened their belts recently, deferred auto repairs often resurface once budgets improve. Few drivers tolerate critical issues like broken air conditioning or non-functional windows for long, especially with summer heat waves intensifying.
Thus, this company’s revenues appear more recession-resistant than discretionary e-commerce categories. The company continues stacking double-digit revenue growth on top of pre-pandemic results. Its Q2 sales reached record highs despite economic pressures.
On the operational side, CarParts.com is squeezing out substantial cost efficiencies across its business, from marketing to fulfillment, supply chain, and more. As the company scales, profitability should leverage higher with its large fixed cost base. Management is currently targeting around a 300 basis point lift in EBITDA margins over the next 3-5 years, a metric I think will likely prove to be conservative. On top of that, this company holds nearly $80 million in cash against no debt, equipping it to opportunistically return capital to shareholders.
Trading at just 0.3-times forward sales, CarParts.com appears significantly undervalued relative to its growth prospects. The company seems poised to deliver GDP-plus revenue growth for years to come. With ample opportunities to capture market share and boost profitability, this is a company that should handily exceed its medium-term financial targets. This auto parts e-tailer still has miles of upside ahead. Accordingly, the average Wall Street analyst sees 172% one-year upside for PRTS stock from here.
Redbubble (OTCMKTS:RDBBF) has faced pandemic-related volatility, and the wobbles are still there. But with growth stabilizing, Redbubble offers substantial recovery potential, trading at just 0.4-times forward sales.
This year, Redbubble’s revenues declined as consumer demand returned to normal post-Covid. However, management expects sales growth to bounce back near double-digits next fiscal year. Over the medium term, the company is targeting 10% annual top-line expansion.
After a period of heavy investment and negative cash flows, Redbubble has also reined in costs to focus on profitable growth. The company reached operating cash flow breakeven in July, earlier than anticipated. With its cost base right-sized, Redbubble appears poised to deliver sustainably positive cash flows moving forward.
Several commercial initiatives have already borne fruit in driving higher sales and margins. The company reduced lower-quality artistic content on its platform, enhanced search and discovery through AI, optimized supply chain routing, and more.
For example, their adjusted profit margin surged 550 basis points higher in Q4 as the product mix shifted towards higher-margin apparel. As management fine-tunes its marketplace, profitability should continue improving. Of course, it has levers to drive significant earnings growth ahead. The company anticipates 23-26% adjusted profit margins next fiscal year, implying substantial operating leverage once growth resumes.
Admittedly, forecasting precisely when Redbubble’s top line continues to inflect higher is challenging. But with underlying marketplace enhancements taking hold, a return to steady growth seems likely in 2023. I wouldn’t shy away from RDBBF stock at this valuation.
Kopin Corporation (KOPN)
With global instability on the rise, companies involved in supplying mission-critical technologies to the defense industry are more crucial than ever. Kopin Corporation (NASDAQ:KOPN) is one such company that provides microdisplays and optical systems for military applications ranging from thermal weapon sights to pilot helmet displays on the F-35 fighter jet.
In my view, Kopin offers a compelling investment case based on its entrenched position in supplying advanced tech to the U.S. military and allies. On the other hand, this company has faced dilution concerns, with its share count ballooning in recent years. However, with its stock stabilizing around $1 per share, much of this downside risk appears priced in. The company doesn’t have much debt either, and $1 has been the floor for the past year.
Plus, as allies urgently invest in bolstering inventories, Kopin’s order book has ballooned, now spanning a multimillion-dollar backlog that is likely in the hundreds of millions. I say likely, as, much like Ammo Inc., the company hasn’t gone into its backlog metrics.
In the meantime, there are other important figures. In its latest quarter, Kopin’s funded R&D revenue grew 39% year-over-year to $3.9 million. This resulted from increased R&D activity for microdisplays used in U.S. defense systems. To top it all off, Kopin also announced a major $12.8 million follow-on order in August for one of its sub-assemblies integrated into an advanced optics system.
Terran Orbital (LLAP)
The space industry is undergoing a transformation, evolving from a domain dominated by governments to one increasingly led by private companies. Terran Orbital (NYSE:LLAP) sits at the forefront of this New Space revolution, providing end-to-end satellite solutions to a rapidly expanding customer base.
In my view, Terran offers tremendous upside from current levels. Its backlog has ballooned to $2.6 billion, over 18-times its sub-$150 million market cap. Terran appears to be significantly undervalued, even after accounting for dilution concerns. Compared to astronomically priced yet deeply unprofitable space peers, paying 2.6-times 2025 earnings for LLAP stock seems compelling.
Of course, risks exist. Terran is ramping production amidst intense competition, while its backlog conversion will take years. Profitability remains elusive. However, its valuation implies much potential downside is already priced in. On the flip side, the company’s leadership team boasts space veterans from Lockheed Martin (NYSE:LMT) and Northrop Grumman (NYSE:NOC). Customers also include NASA, the European Space Agency, and the U.S. Department of Defense. And Terran can leverage synergies as a Lockheed subsidiary following its strategic investment last year.
Delivering on contracts has proved challenging, however. This has meant Terran’s revenue has tripled, but its gross margins still linger below 10%. Supply chain shortages and production ramp inefficiencies have persisted. Still, management expects smoother execution will boost gross margins to the 20% range by next year. Accordingly, Wall Street analysts see 562% upside over the next year.
Luminar Technologies (LAZR)
Few stocks have proved as frustrating recently as Luminar Technologies (NASDAQ:LAZR). After surging in late 2020 amidst lidar hype, LAZR stock has plunged nearly 90% from its highs. However, rather than lose conviction, I believe it now offers an opportune entry point for Luminar. The massive growth is far from priced in.
It is targeting a $60 billion order book by the decade’s end (seen as too optimistic by many). Yet signs of tangible progress continue mounting. Luminar now touts over a dozen major commercial wins, with automakers planning to deploy its lidar. I personally think this order book target is achievable, as it would only require 3-4% market penetration, as per the company’s management.
As volumes start ramping in 2024 and margins improve, upside from today’s prices could prove substantial. Still, I’m putting this at the bottom of today’s list as its market cap makes it a partial “penny stock,” but it is definitely a hypergrowth stock. Wall Street’s consensus one-year upside potential sits at 140%.
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.