It’s easy to understand the allure of penny stocks, particularly for those new to the market. For relatively little money, an investor can control hundreds if not thousands of shares of a company. And if the stock moves up by literally just pennies, you can make huge profits.
The problem is that penny stocks are — more often than not — cheap for a reason. Typically they don’t even have a product or service. They are simply a story, often about whatever is hot at the moment and how they will become the next Microsoft (NASDAQ:MSFT) or Walmart (NYSE:WMT). They also are ripe for manipulation. Investing in penny stocks is more likely to result in getting slaughtered than making a killing.
Betting on a company offering just hype or hope is not investing, but gambling. That’s why very few people have been able to consistently trade penny stocks profitably.
But there is no need to go dumpster diving on Wall Street to find exciting growth stock ideas. There are plenty of affordable stocks that have proved themselves and offer a real opportunity to profit over time. Don’t view investing as a get-rich-quick scheme but as a long-term wealth-building machine. The following three cheap companies are much better stocks to buy instead of penny stocks.
AGNC Investment (AGNC)
Mortgage real estate investment trust (mREIT) AGNC Investment (NASDAQ:AGNC) offers investors the potential for both growth and income. Its business is simple. It borrows money at low, short-term rates, then invests it in higher-yielding long-term assets — more often than not, mortgage-backed securities (MBS). At the end of the third quarter, it held $55.9 billion worth of its $59.3 billion investment portfolio in agency MBS.
Agency MBS are those backed by the full faith and credit of the U.S. government, usually through a government-sponsored enterprise like Fannie Mae, Freddie Mac or Ginnie Mae. Because the government is backing these loans, the risk to AGNC is minimal and it allows the REIT to leverage its portfolio to generate maximum profits.
The problem for AGNC Investment is the high-interest rate environment we’re currently in. High rates impede the REIT’s ability to buy low and sell high. AGNC president and CEO Peter Federico said, “In environments like this when treasury prices fall abruptly and the market struggles to find its new equilibrium, agency MBS typically underperformed. That was indeed the case in the third quarter, as agency MBS performance relative to benchmark rates lagged meaningfully.” AGNC reported a loss of $1.02 per share for the period. Its stock is down 26% in 2023. As the situation normalizes over time, though, profitability will return.
In the meantime, AGNC offers investors a lucrative dividend that yields an eye-popping 17.65% annually. Since its founding in 2008, it has paid a monthly dividend. That will soften the blow of its depressed stock, which currently goes for just under $8 per share.
Edge computing specialist Fastly (NASDAQ:FSLY) is another leading company that’s better than a penny stock and goes for a cheap $14.25 per share.
Edge computing refers to the practice of moving cloud resources closer to the edge of the network. That’s where data is generated and users are located. Since they are where the real-time processing occurs, it allows for faster response times. Fastly is responsible for increasing the speed by reducing data latency and improving content delivery.
Part of Fastly’s problem, particularly in the current environment, is it has never been profitable. Though a growing business, the company has found it difficult to translate that into profits and the post-pandemic world hasn’t been kind. Investors prefer profit-making stocks during periods of turmoil. Shares are down 41% from their 52-week high.
Yet businesses are still moving their data and operations to the cloud and will need Fastly’s services. The company recorded record revenue of $122.8 million in the second quarter, up 20% year-over-year. It has 3,072 customers, 551 of which are enterprise class. Its dollar-based net expansion rate (DBNER), or how much more existing customers are spending with Fastly, grew to 123% for the period. That means they spent 23% more than the same period last year.
Customers are obviously satisfied with what they’re receiving from Fastly. The edge cloud specialist’s customer retention rate stands at 116% for each of the past two years.
Ma Bell can ring you up growth and income, too. Though shares of AT&T (NYSE:T) are down about 25% from recent highs, that’s helped push its yield up to 7%. It’s not the nosebleed territory of AGNC Investment, but it is a lucrative yield nonetheless as investors await the stock’s rebound.
AT&T is depressed due to concerns over buried lead-lined telephone cables from decades past. It’s alleged the cables could be leaching into the surrounding ground and water, holding potential liability for the telecom. AT&T denies there is an issue as in-house testing and independent experts say no harm is being caused.
The issue will weigh on AT&T for a while, but that allows investors to buy the stock cheaply. Shares trade for 6 times next year’s earnings estimates, a fraction of its sales and an incredible discount of less than 7 times the free cash flow it generates. Considerable tailwinds are building up behind the telecom as well.
The ongoing 5G network infrastructure rollout over the next few years continues to be a strong argument in favor of the stock. It is one of the most critical and long-awaited upgrades consumers and businesses have demanded. As AT&T generates some of its highest profit margins from data usage, it ought to result in significant increases in the future. It’s certainly why AT&T is willing to spend billions of dollars to upgrade its network.
At just over $15 per share, Ma Bell makes for a compelling investment beyond any penny stock.
On the date of publication, Rich Duprey held a long position in T stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.