In this article we’re going to look into what penny stocks are and which are the 10 best penny stocks to buy now.
If you’ve been around investing for even a short time, or if you’ve at least watched or read “Wolf of Wall Street”, you have heard about the term “penny stocks”. Penny stocks are categorized by the SEC as those that trade for less than $5 per share. Although it’s not uncommon to classify as penny stocks those companies whose shares trade for under $1 and especially those that trade on the loosely-regulated Over-the-Counter market.
The main reason why people buy penny stocks is their cheap price, which allows buying a large amount of shares for a relatively small sum. The shares are bought in the hope that when the stock skyrockets, it will result in huge returns. So buying penny stocks provides investors the opportunity to be on the “ground zero” of a company. Or at least that’s how they are presented.
Let’s say company X is a biotech company working on a drug that could be a breakthrough in treating some disease. Now, this company opted for listing its stock to raise capital, instead of finding other sources. Its stock is trading at $0.50 per share. Let’s assume the company is successful and it manages to develop the drug and it’s approved by the regulators, so the stock price jumps to $5.00, which represents a 10-fold increase. If you’d invested $1,000 in the stock, you’d collect $10,000.
This sounds quite appealing, right? However, the reality is that most penny stocks never appreciate significantly, and out of those few that do grow, most of the gains are collected not by regular investors, but by penny-stock promoters and people launching pump-and-dump schemes. One rule of thumb is if you want to invest in penny stocks, don’t do so by subscribing to various emails that promise you the next breakout trade that will give you 1,000% in return in 3 months.
So, while there are many other rules that can guide you about how to trade penny stocks, we would like to talk to you about how to pick them. More specifically, we would like to present you with a list of the 10 best penny stocks to buy now based on hedge fund sentiment, a metric that we believe is a good indicator of a stock’s reliability. Hedge funds spend a lot of resources on researching their trades and when they’re bullish on a penny stock, it means that it has potential for a solid growth over the long-run.
We are following hedge funds and identifying their most popular picks because we believe that this is a strategy that has the potential to beat the market. And we don’t just believe it, but we have the research and historical evidence to back this up. Since March 2017, our diversified portfolio of monthly newsletter’s stock picks (which are sourced from 13F filings, hedge fund presentations, and investor letters) returned 145%, beating the benchmark S&P 500 ETF (SPY) by more than 78 percentage points. Follow this link to find out more about our strategy and to download a free sample issue of our newsletter.
Without any further ado, let’s take a look at 10 best penny stocks to buy now. To compile this list we identified the most popular stocks among the hedge funds we track at Insider Monkey, whose price is less than $5.00 per share. You can skip ahead and see which are the top 5 best penny stocks to buy now by clicking on this link.
10. Ambev ADR (ABEV)
Ambev ADR (NYSE:ABEV) saw a significant increase in the number of bullish investors – from 13 to 21 funds during the third quarter. Moreover, the aggregate value of their holdings surged to $790.35 million from $517.66 million. Among these funds, the top position is held by Jean-Marie Eveillard’s First Eagle Investment Management, which owns 216.29 million shares worth $488.81 million. Other notable shareholders are Nicolai Tangen’s Ako Capital and Jim Simons’ Renaissance Technologies.
Broyhill Asset Management talked about ABEV in their 2020 Q2 investor letter. Here is what they said:
“We also diversified our beer exposure during the quarter, adding a direct investment in Ambev (ABEV) to compliment our existing investment in Anheuser Busch Inbev (BUD). As the current environment has punished highly leveraged businesses like BUD (despite the company’s ability to generate strong and recurring cash flow), the opportunity to own ABEV, with net cash on its balance sheet and the highest returns on capital in the industry—at a lower multiple than its parent—was too good to pass up.
Together, these names represent roughly 20% of our capital today. Given their cheap valuations, combined with the fact that beer and tobacco consumption has historically increased during recession, one could argue that we should have even more exposure to these Sin Stocks. In principle, we agree, and given the opportunity, we’d be happy to increase our positions. But in the interim, we are highly sensitive to maintaining balance in the portfolio. At one end, we own high quality, defensive businesses that should fare well in almost any environment. At the other end, we’ve begun building a portfolio of more cyclical businesses, positioned to rebound sharply and gain share once the clouds clear. We discuss a few of these investments below.”
ABEV is up more than 50% since May, however, we still think it still has an upside potential of more than 30% in the next 12 months. We actually considered adding ABEV to our monthly newsletter’s recommendation list, however, we uncovered another deeply undervalued stocks that has an upside potential of 200% and we recommended that stock instead.
9. WisdomTree Investments Inc (WETF)
WETF ranks 9th in our list of the 10 best penny stocks to buy now. The number of funds betting on WisdomTree Investments Inc (NASDAQ:WETF) went up by four to 22 between July and September. Jim Simons’ Renaissance Technologies disclosed holding $10.86 million shares worth of WisdomTree Investments in its latest 13F filing, followed by Daniel Johnson’s Gillson Capital with a $4.92 million position.
WisdomTree Investments shares returned nearly 40% since the end of September and now trade near the high achieved back in February. Even though the stock offers a 2.5% dividend yield, we don’t think it is a screaming buy at this price. It may still outperform the market in 2021 as income hungry investors will probably rush into dividend stocks after we defeat the coronavirus pandemic towards the end of the first half of the year.
8. Nextier Oilfield Solutions Inc (NYSE:NEX)
NEX ranks 8th in our list of the best penny stocks to buy now. There were 22 funds holding shares of Nextier Oilfield Solutions Inc (NYSE:NEX) at the end of September, down by two over the quarter. Among the funds tracked by Insider Monkey, Stephen Feinberg’s Cerberus Capital Management is the top shareholder of the company, reporting ownership of 40.08 million shares worth $71.93 million in its latest 13F filing.
We saw a bunch of insider sales in NEX shares in early 2019 when NEX was trading above $10. NEX closed 2019 at slightly below $7 and today trade at only $$3.52. This is a risky stock operating in a very risky industry. Even though there are a lot of hedge funds holding this micro-cap stocks, traditional conservative fund managers are staying away. We believe hedge funds have the better odds on their side as NEX doesn’t carry a lot of debt on its balance sheet (it isn’t like OXY or Exxon) and we are only a few months away from the end of the coronavirus pandemic. We have better stocks in our monthly newsletter’s portfolio than NEX, but we don’t think you’ll regret if you dip your toes into Nextier Oilfield Solutions at $3.50.
7. Dynavax Technologies Corporation (DVAX)
DVAX ranks 7th in our list of the 10 best penny stocks to buy now. In Dynavax Technologies Corporation (NASDAQ:DVAX), there were 23 investors tracked by Insider Monkey holding positions, versus 17 funds a quarter earlier, although the total value of these positions dropped to $58.10 million from $122.51 million a quarter earlier. One of the investors that added Dynavax Technologies Corporation to its portfolio during the third quarter is Israel Englander’s Millennium Management, which acquired 1.12 million shares.
Dynavax is a vaccine company, known for its hepatitis B vaccine. Unfortunately, it isn’t selling a lot of this vaccine and still losing money. That’s why earlier this year it ventured into COVID-19 vaccine business. According to Motley Fool “Dynavax is developing an adjuvant against the coronavirus called CpG 1018, which consists of short DNA molecules that mimic viral genetic material. These strands are added to conventional vaccines, boosting immune response while enhancing the vaccine’s efficacy”. Dynavax’s shares popped above $12 in July due to vaccine optimism, but as you can guess gave back those gains. We don’t like risking our hard saved dollars in speculative vaccine plays, especially now that Pfizer (PFE) has an FDA approved vaccine with 94% efficacy and another mRNA based vaccine is near approval. If Pfizer’s vaccine had an efficacy of 60%, we might have felt like gambling a little bit. That’s not the case, so even though hedge funds think this is a good stock to buy, we won’t swing at this pitch.
6. BGC Partners, Inc. (NASDAQ:BGCP)
BGC Partners, Inc. (NASDAQ:BGCP) saw the number of bullish investors dropping by five to 23 during the third quarter. The top shareholder of BGC Partners among the investors in our database is Amy Minella’s Cardinal Capital, followed by David Rosen’s Rubric Capital Management, which held stakes valued at $34.40 million and $22.65 million, respectively, at the end of September.
BGC Partners is down about 30% over the last 12 months, but its shares gained nearly 70% over the last two months. We don’t think BGCP is done with its recovery. Hedge funds are betting on that as life starts to go back normal and economic growth picks up, BGCP will keep increasing and continue to deliver them outsized gains.
5. Kadmon Holdings Inc (NASDAQ:KDMN)
In Kadmon Holdings Inc (NASDAQ:KDMN), there were 24 investors holding shares at the end of September, down by five over the quarter. Joseph Edelman’s Perceptive Advisors and Mitchell Blutt’s Consonance Capital Management are among the top shareholders of the company with stakes worth $61.59 million and $54.91 million, respectively.
You have to pay attention whenever you see Perceptive Advisors among the top holders of a publicly traded stock. Joe Edelman’s healthcare focused hedge fund returned close to 54% in 2019 net of large hedge fund fees and this isn’t the first time he pulled off that feat. How many investors do you know who can deliver similar returns in multiple years.
4. Comstock Resources Inc (NYSE:CRK)
At the end of September, 24 funds held shares of Comstock Resources Inc (NYSE:CRK) with a total value of $123.59 million, significantly up from 17 funds and $82.36 million, respectively a quarter earlier. Matt Smith’s Deep Basin Capital, which is the top shareholder of Comstock Resources among the funds in our database, more than doubled its position during the quarter to 5.24 million shares worth $123.59 million.
This is another beaten down energy company that made our list of the best penny stocks to buy now. CRK is a very leveraged stock though. Even though its market cap is only $1.1 billion, its enterprise value is nearly $4 billion. Leveraged stocks could easily go bankrupt, but if CRK hasn’t gone bankrupt so far, it will probably survive the pandemic. If oil prices manage to climb above $60 in 2021, CRK investors can easily outperform the market by a huge margin.
3. Colony Capital Inc (NYSE:CLNY)
Colony Capital Inc (NYSE:CLNY) saw the number of bullish investors go up by eight to 24, while the aggregate value of their positions surged to $188.77 million from $83.81 million between July and September. Seth Klarman’s Baupost Group disclosed holding 22.62 million shares worth $61.76 million in its latest 13F filing.
2. Clear Channel Outdoor Holdings Inc (NYSE:CCO)
The number of funds from our database that hold shares of Clear Channel Outdoor Holdings Inc (NYSE:CCO) went up to 30 from 27 during the third quarter. Among these funds, Kenneth Mario Garschina’s Mason Capital Management and Don Morgan’s Brigade Capital are the top shareholders with $35.83 million and $18.35 million worth of stock, respectively.
We like outdoor advertising stocks but CCO is a highly leveraged stock. Its market cap is merely $650 million, but its enterprise value is more than $7 billion. Huge leverage means huge upside potential if things go well.
1. Genworth Financial Inc (NYSE:GNW)
With a total of 38 funds that held in aggregate $249.19 million worth of stock, Genworth Financial Inc (NYSE:GNW) is the most popular penny stock among hedge funds. The company saw an increase in bullish sentiment among the investors tracked by us, as three months earlier, there were 36 funds holding $164.49 million worth of shares. Among the top shareholders of Genworth Financial are Bill Miller’s Miller Value Partners and Himanshu H. Shah’s Shah Capital Management, which reported ownership of 10.34 million shares and 9.23 million shares, respectively, as of the end of September.
Bill Miller’s hedge fund is among the funds we track closely. They talked about GNW in their 2020 Q2 investor letter:
“Genworth Financial Inc. (GNW) declined -30.5% during the quarter as investors grew concerned on the potential closing of the acquisition by China Oceanwide. The company noted on their 1Q call that China Oceanwide’s financing plans were “progressing well,” but also noted that China Oceanwide was having discussions with third parties beyond their primary lender creating concern that the primary lender might not follow through on its commitment. Management noted that they expect the deal to close by June 30th, but noted that the buyer had allowed Genworth to explore alternatives it could pursue if the deal fell through. The company reported 1Q revenue of $1.84B below consensus of $1.99B with EPS of $0.07 below consensus of $0.27. After the quarter ended, the company announced another extension of the acquisition agreement with China Oceanwide. The new agreement extends the merger deadline to September 30th with an interim update on financing by August 31th. The company held a call to discuss the extension as well as “Plan B” options available to it if the deal fails.”
This concludes our list of the best penny stocks to buy according to hedge funds. Please also see 10 best large-cap stocks to buy now and 10 best value stocks to invest in.
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Disclosure: None. 10 Best Penny Stocks To Buy Now is originally published at Insider Monkey.
