12 Cheap Penny Stocks to Buy According to Hedge Funds

In this article, we discuss 12 cheap penny stocks to buy according to hedge funds.

A lot of investors find penny stocks, which are stocks with low share prices, to be attractive as they appear to be a good deal. In contrast to expensive stocks that may cost a substantial amount of money for just one share, penny stocks have prices that are below $5 and can be an appealing choice for individuals seeking to rapidly increase their earnings. Although investing in young companies with low valuations or discounted stock prices can lead to substantial returns, it is generally wiser to invest in larger, established companies with more stable and less speculative valuations. Typically, accomplished investors prioritize the possibility of their chosen stocks to increase in value over an extended period, without taking into account their initial cost.

In March 2021, Kate Rooney from CNBC investigated the reason behind the surge in the popularity of penny stocks due to discussions on Reddit. She noted that over-the-counter (OTC) markets were extremely popular during 2021, with OTC trading volume in February 2021 up 2000% as compared to the same period last year, exceeding $1.9 trillion in value. Penny stocks climbed dramatically on the back of retail interest in GameStop Corp. (NYSE:GME), the leader of the Reddit meme stock frenzy, DogeCoin, and NFTs. 

Penny stocks have a significant presence in the market, with tens of millions of people trading them. While success rates may vary, small stocks have an established place in the market. One notable aspect of these stocks is their broad appeal, as they attract investors from diverse backgrounds. People of all experience levels, from beginners to experienced traders seeking to invest in promising up-and-coming companies, are involved in trading penny stocks. Some of the biggest companies today, including Apple Inc. (NASDAQ:AAPL), Advanced Micro Devices, Inc. (NASDAQ:AMD), and Ford Motor Company (NYSE:F), once traded as penny stocks. 

Our Methodology 

We chose the top cheap penny stocks based on overall hedge fund sentiment, with P/E ratios of less than 15 as of March 29. These stocks are priced under $5. We have assessed the hedge fund sentiment from Insider Monkey’s database of 943 elite hedge funds tracked as of the end of the fourth quarter of 2022. The list is arranged in ascending order of the number of hedge fund holders in each firm. 

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Cheap Penny Stocks to Buy According to Hedge Funds

12. Gerdau S.A. (NYSE:GGB)

Number of Hedge Fund Holders: 13

P/E Ratio as of March 29: 3.82

Gerdau S.A. (NYSE:GGB) is a steel producer in the Americas. The company operates through Brazil Business, North America Business, South America Business, and Special Steel Business divisions. The company was founded in 1901 and is based in São Paulo, Brazil. Gerdau S.A. (NYSE:GGB) paid a $0.0384 per share quarterly dividend on March 30.

On February 8, Goldman Sachs analyst Marcio Farid downgraded Gerdau S.A. (NYSE:GGB) to Neutral from Buy with a price target of R$31, down from R$38. Despite the stock’s 8% increase after being added to the Buy list, it has outperformed the average LatAm steel peer by 35% and the LatAm materials sector by 16%. However, the analyst cautioned investors that weakening profitability in its core markets of the U.S. and Brazil, along with increasing capital expenditures, will restrict Gerdau S.A. (NYSE:GGB)’s capacity to distribute cash to shareholders.

According to Insider Monkey’s fourth quarter database, 13 hedge funds were bullish on Gerdau S.A. (NYSE:GGB), with collective stakes worth $375.6 million, compared to 15 funds in the prior quarter worth $200 million. Jon Bauer’s Contrarian Capital is the largest stakeholder of the company, with 18.5 million shares worth $102.7 million. 

Like Apple Inc. (NASDAQ:AAPL), Advanced Micro Devices, Inc. (NASDAQ:AMD), and Ford Motor Company (NYSE:F), Gerdau S.A. (NYSE:GGB) is one of the top stocks on the radar of smart investors. 

11. Lufax Holding Ltd (NYSE:LU)

Number of Hedge Fund Holders: 17

P/E Ratio as of March 29: 3.69

Lufax Holding Ltd (NYSE:LU) is a Chinese company that runs a personal finance services platform utilizing technology. The company provides different types of loan products, such as unsecured and secured loans, as well as consumer finance loans. On March 15, Lufax Holding Ltd (NYSE:LU) declared a semiannual dividend of $0.05 per share, which is payable on April 21, to shareholders of record on April 7. It is one of the top cheap penny stocks to invest in. 

Carson Lo, an analyst at HSBC, maintained a Buy rating on Lufax Holding Ltd (NYSE:LU) but reduced the price target on the shares to $3 from $4 on March 14. The analyst noted that Lufax Holding Ltd (NYSE:LU)’s expected recovery in the second half of 2023 is still valid, but it is anticipated to be more concentrated towards the end of Q4. This is due to a delay in the recognition of credit performance.

According to Insider Monkey’s fourth quarter database, 17 hedge funds were long Lufax Holding Ltd (NYSE:LU), compared to 14 funds in the prior quarter. Thomas Steyer’s Farallon Capital is the largest stakeholder of the company, with 38.4 million shares worth $74.5 million. 

10. Olaplex Holdings, Inc. (NASDAQ:OLPX)

Number of Hedge Fund Holders: 17

P/E Ratio as of March 29: 11.45

Olaplex Holdings, Inc. (NASDAQ:OLPX) develops, manufactures, and markets hair care products. The company offers hair care shampoos and conditioners for use in treatment, maintenance, and protection of hair. It is one of the best cheap penny stocks that smart investors are piling into. 

On March 16, Piper Sandler analyst Korinne Wolfmeyer maintained a Neutral rating on Olaplex Holdings, Inc. (NASDAQ:OLPX) and lowered the firm’s price target on the shares to $4 from $5. A survey conducted by Piper of 231 Olaplex-certified stylists suggests that there is ongoing pressure in the firm’s primary channel. The analyst noted that the company’s expanded distribution has led to increased frustration among stylists, causing many to give up competing with larger retail companies. The firm also expressed little confidence in the management’s margin targets for this year and does not anticipate any significant upside.

According to Insider Monkey’s fourth quarter database, 17 hedge funds were bullish on Olaplex Holdings, Inc. (NASDAQ:OLPX), compared to 18 funds in the prior quarter. Paul Marshall and Ian Wace’s Marshall Wace LLP is the biggest stakeholder of the company, with 3.05 million shares worth approximately $16 million. 

Polen Capital made the following comment about Olaplex Holdings, Inc. (NASDAQ:OLPX)  in its Q4 2022 investor letter:

“Olaplex Holdings, Inc. (NASDAQ:OLPX) is a leader in the professional, luxury hair care and beauty products business. The company is a pioneer in science-based haircare, which is still in its early days compared to other parts of the luxury beauty market, like skincare. The company has built a dominant brand, delivering robust sales growth by leveraging salon relationships, word of mouth, and social media. We believe the business has a long runway of growth ahead driven by expanding distribution networks, deeper penetration amongst existing clients, and introducing new products. Olaplex is also a rare find among 2021 IPOs with strong profits, high free cash flow, impressive returns on capital, an experienced management team, and a long history as a private company and brand.”

9. Nokia Oyj (NYSE:NOK)

Number of Hedge Fund Holders: 17

P/E Ratio as of March 29: 5.89

Nokia Oyj (NYSE:NOK), a Finnish multinational company that provides mobile, fixed, and cloud network solutions worldwide, is one of the best cheap penny stocks on the radar of elite hedge funds. On March 27, Nokia Oyj (NYSE:NOK) announced an update to its AVA Energy efficiency software. The software now includes improved algorithms and power-saving measures that broaden its application to drive more significant reductions in network power consumption. The upgraded Nokia AVA Energy efficiency tool now empowers Communications Service Providers (CSPs) to lower energy usage in their data centers, as well as network base stations, batteries, and air conditioning units in telecommunications networks.

On February 14, Credit Suisse analyst Adithya Metuku maintained an Outperform rating on Nokia Oyj (NYSE:NOK) but lowered the firm’s price target on the shares to EUR 5.61 from EUR 6.05. 

According to Insider Monkey’s fourth quarter database, 17 hedge funds were long Nokia Oyj (NYSE:NOK), compared to 24 funds in the preceding quarter. Ben Levine, Andrew Manuel, and Stefan Renold’s LMR Partners is the largest stakeholder of the company, with 10.3 million shares worth $47.85 million. 

8. Banco Santander, S.A. (NYSE:SAN)

Number of Hedge Fund Holders: 17

P/E Ratio as of March 29: 5.87

Banco Santander, S.A. (NYSE:SAN) offers retail and commercial banking products and services to individuals, small and medium-sized companies, and large enterprises worldwide. The company operates through Retail Banking, Santander Corporate & Investment Banking, Wealth Management & Insurance, and PagoNxt segments. It is one of the top cheap penny stocks to invest in. On February 2, Banco Santander, S.A. (NYSE:SAN) reported a Q4 GAAP EPS of €0.13, net interest income of €10.16 billion, and total income of €13.53 billion. 

On March 22, Exane BNP Paribas revised its rating for Banco Santander, S.A. (NYSE:SAN) from Neutral to Outperform and set a price target of EUR 4.40. The firm’s decision was based on a more optimistic outlook for Brazil, which was deemed favorable for the upgrade. Additionally, Exane BNP Paribas believes that the market’s estimates for Banco Santander, S.A. (NYSE:SAN) are overly pessimistic.

According to Insider Monkey’s fourth quarter database, 17 hedge funds were bullish on Banco Santander, S.A. (NYSE:SAN), compared to 12 funds in the prior quarter. John W. Rogers’ Ariel Investments is the largest stakeholder of the company, with 1.02 million shares worth $16.2 million. 

7. Itaú Unibanco Holding S.A. (NYSE:ITUB)

Number of Hedge Fund Holders: 18

P/E Ratio as of March 29: 7.80

Itaú Unibanco Holding S.A. (NYSE:ITUB) offers a range of financial products and services to individuals and corporate customers in Brazil and internationally. The company operates through three segments – Retail Banking, Wholesale Banking, and Activities with the Market + Corporation. On March 23, Itaú Unibanco Holding S.A. (NYSE:ITUB) declared a $0.0374 per share dividend, which is payable on September 11 to shareholders of record on March 27. It is one of the best cheap penny stocks to watch. 

On February 9, Grupo Santander analyst Henrique Navarro upgraded Itaú Unibanco Holding S.A. (NYSE:ITUB) to Outperform from Neutral with a $5.70 price target.

According to Insider Monkey’s fourth quarter database, 18 hedge funds were bullish on Itaú Unibanco Holding S.A. (NYSE:ITUB), compared to 16 funds in the earlier quarter. William B. Gray’s Orbis Investment Management is the largest stakeholder of the company, with 16.4 million shares worth $77.6 million. 

Ariel Global Strategy made the following comment about Itaú Unibanco Holding S.A. (NYSE:ITUB) in its Q4 2022 investor letter:

“We initiated two new positions in the quarter. Macro-uncertainty also presented us with an opportunity to buy shares of Brazilian financial services company, Itaú Unibanco Holding S.A. (NYSE:ITUB). The company is led by a dynamic CEO, who is utilizing technology in the private banking sector as part of a broader move towards digitization. This strategy is not only reducing distribution costs, but is enabling the creation of new products in high market share areas such as private banking, credit cards, as well as small- and medium-size business lending. An attractive valuation, strong net interest margins and high return on equity are among the attributes motivating our purchase of shares.”

6. Ferroglobe PLC (NASDAQ:GSM)

Number of Hedge Fund Holders: 20

P/E Ratio as of March 29: 1.94

Ferroglobe PLC (NASDAQ:GSM) was incorporated in 2015 and is headquartered in London, the United Kingdom. Ferroglobe PLC (NASDAQ:GSM) is a company that works in silicon and specialized metals industries across the United States, Europe, and internationally. The company offers silicone chemicals that have a wide range of applications, such as personal care products, construction-related items, healthcare products, and electronics. 

On February 27, B. Riley raised the firm’s price target on Ferroglobe PLC (NASDAQ:GSM) to $11 from $10 and kept a Buy rating on the shares. The company had a strong performance in the fourth quarter, driven by energy and carbon compensation, the firm told investors in a research note. 

According to Insider Monkey’s fourth quarter database, 20 hedge funds were bullish on Ferroglobe PLC (NASDAQ:GSM), compared to 24 funds in the prior quarter. Jeremy Hosking’s Hosking Partners is the biggest stakeholder of the company, with 5 million shares worth $19.4 million.  

In addition to Apple Inc. (NASDAQ:AAPL), Advanced Micro Devices, Inc. (NASDAQ:AMD), and Ford Motor Company (NYSE:F), Ferroglobe PLC (NASDAQ:GSM) is one of the best stocks to invest in. 

5. Genworth Financial, Inc. (NYSE:GNW)

Number of Hedge Fund Holders: 23

P/E Ratio as of March 29: 4.17

Genworth Financial, Inc. (NYSE:GNW) provides insurance products in the United States and internationally. The company was founded in 1871 and is headquartered in Richmond, Virginia. One of Genworth Financial, Inc. (NYSE:GNW)’s achievements in 2022 was reaching its long-term debt goal and distributing profits to shareholders for the first time in over 13 years. The adjusted earnings per share for Q4 2022 were $0.33, which exceeded the market consensus of $0.23. Additionally, Genworth Financial, Inc. (NYSE:GNW)’s revenue increased to $1.90 billion in Q4, up from $1.84 billion in the previous quarter. It is one of the best cheap penny stocks to invest in according to hedge funds. 

According to Insider Monkey’s fourth quarter database, 23 hedge funds were bullish on Genworth Financial, Inc. (NYSE:GNW), compared to 25 funds in the last quarter. GLG Partners is the biggest position holder in the company, with 3.5 million shares worth $18.70 million. 

Here is what Ravensource Fund has to say about Genworth Financial, Inc. (NYSE:GNW) in its Q4 2021 investor letter:

“Genworth is a U.S. publicly listed (NYSE:GNW) insurance company that covers mortgage, life and long-term care needs. In 2021, the market price of our Genworth common shares increased from $3.78 to $4.05, growing the value of your Ravensource investment by 0.4%.

Much like Quad, Genworth had a transformative year. And much like Quad essentially none of its achievements were reflected in its share price. In 2021, Genworth sold its stake in its Australian mortgage insurance unit and successfully completed a partial IPO of its crown jewel U.S. mortgage insurer, both key milestones for our thesis. These non-core asset sales enabled Genworth to reduce its debt by ~$1bn / 50% in 2021, with over $3bn of total debt reduction since our initial investment. Genworth has gone from a company whose senior debt was trading at 10% yields, to a strong healthy company intending to return capital to shareholders in 2022 — the first time it will have done so since 2008. This is a critical final-stage step to Genworth rebuilding its market credibility and investor base, and will help bridge the gap between the current price and our conservative value of $5.00, representing a 23.5% potential return.”

4. Sirius XM Holdings Inc. (NASDAQ:SIRI)

Number of Hedge Fund Holders: 26

P/E Ratio as of March 29: 12.70

Sirius XM Holdings Inc. (NASDAQ:SIRI) is an audio entertainment company in the United States. On March 6, the company disclosed that it trimmed the size of its workforce by 8%, which amounts to 475 employees. Sirius XM Holdings Inc. (NASDAQ:SIRI) revealed that its decision to reduce the workforce was necessary in order to maintain a sustainable profitable company. It is one of the best cheap penny stocks to watch. 

On February 22, Barton Crockett, an analyst at Rosenblatt, decreased Sirius XM Holdings Inc. (NASDAQ:SIRI)’s rating from Buy to Neutral and reduced the price target from $7.40 to $4.80. The analyst observed that new and used car sales, which significantly contribute to subscriber growth, are not performing well and Sirius XM Holdings Inc. (NASDAQ:SIRI) has predicted a minor drop in subscribers in 2023. Despite the fact that Sirius XM’s paid subscription churn rate was at an all-time low in Q4, the CEO’s statements are in line with the notion that customers, over time, will tend to move away from satellite radio and toward other streaming services, which has been a long-standing negative stance, the analyst wrote in research note. 

According to Insider Monkey’s fourth quarter database, 26 hedge funds were long Sirius XM Holdings Inc. (NASDAQ:SIRI), compared to 24 funds in the prior quarter. Stuart J. Zimmer’s Zimmer Partners is a prominent stakeholder of the company, with 3.13 million shares worth $18.30 million. 

3. Altice USA, Inc. (NYSE:ATUS)

Number of Hedge Fund Holders: 27

P/E Ratio as of March 29: 7.26

Altice USA, Inc. (NYSE:ATUS) offers broadband communications and video services in the United States, Canada, Puerto Rico, and the Virgin Islands. It provides broadband, video, telephony, and mobile services to residential and business customers. According to Cowen analyst Gregory William, Altice USA, Inc. (NYSE:ATUS)’s financial results for the fourth quarter of 2022 were lower than expected, and the company is still spending heavily on operating expenses to revive the business in anticipation of growth in broadband subscribers. As a result, William reduced the firm’s price target on Altice USA, Inc. (NYSE:ATUS) from $21 to $18, but maintained an Outperform rating on the shares on February 23. 

According to Insider Monkey’s fourth quarter database, 27 hedge funds were bullish on Altice USA, Inc. (NYSE:ATUS), and Jonathan Kolatch’s Redwood Capital Management is the largest stakeholder of the company, with 15.2 million shares worth $70.3 million. 

Here is what MPE Capital has to say about Altice USA, Inc. (NYSE:ATUS) in its Q2 2022 investor letter:

“Two (very) costly mistakes I’ve made over the last twelve months have been my investments in Altice USA and Poshmark. Both are down over 50% from my initial purchase price. I not only poorly appraised business quality, I also incorrectly appraised the intrinsic value of both of these companies. It should rarely end up in the case that we pay over intrinsic value, at worst case we should never lose money on an investment. I will dive into one of these mistakes below and maybe dive into the other in a future letter. My thinking when buying Altice USA was that they operate as a duopoly in their main footprint, the New York Tri-State area. They provide a needs-based service: internet, video, and voice services. I figured this is a very stable business with high barriers to entry. Management seemed competent as well based on historical capital allocation decisions. I didn’t fully appreciate at the time how poorly positioned they were relative to Verizon Fios, as well as how fiercely competitive the business can get on promotions and customer acquisition.

Altice offers hybrid fiber coaxial (HFC) while Fios offers fiber-to-the-home (FTTH). FTTH is a far superior product, which has led to some share loss to Fios in the parts of their footprint that overlap. There have also been some subscriber losses in their other footprint due to new cable entrants and fixed wireless offerings. (Click to read full text)

2. Southwestern Energy Company (NYSE:SWN)

Number of Hedge Fund Holders: 44

P/E Ratio as of March 29: 2.96

Southwestern Energy Company (NYSE:SWN) is an independent energy company that engages in the exploration, development, and production of natural gas, oil, and natural gas liquids in the United States. Southwestern Energy Company (NYSE:SWN)’s capital investments in the fourth quarter of 2022 were $537 million, bringing full year capital investment to $2,209 million. The company sold 133 wells, drilled 138 wells, and completed 139 wells during the year.

Morgan Stanley analyst Devin McDermott revised the firm’s commodity assumptions for Southwestern Energy Company (NYSE:SWN) based on Q1 actuals and Q2 strip. As a result, McDermott lowered the firm’s price target on Southwestern Energy Company (NYSE:SWN) from $6 to $5 on March 27, while maintaining an Equal Weight rating on the shares. Across Morgan Stanley’s coverage, the analyst has observed a 1% decrease in WTI oil prices in Q1 and a 23% decrease in Q2 to align with the strip. For natural gas, the analyst has updated Henry Hub prices downward by 13% to account for Q1 actuals and an average of 24% for the rest of the year to align with the strip.

According to Insider Monkey’s fourth quarter database, 44 hedge funds were bullish on Southwestern Energy Company (NYSE:SWN), compared to 51 funds in the prior quarter. D E Shaw is the largest stakeholder of the company, with 19.4 million shares worth $113.4 million. 

Here is what Greenlight Capital has to say about Southwestern Energy Company (NYSE:SWN) in its Q1 2022 investor letter:

“SWN is the second largest producer of natural gas in the U.S. The company is well-situated to satisfy growing domestic and export demand. Over the short, medium and long term, Europe now intends to reduce its reliance on Russian energy and increase its use of U.S. LNG. Based on its 2021 year-end reserves – which assumed a $3.60/MMBtu long-term natural gas price – SWN has a PV-104 value of $13.83 per share. By the end of the first quarter, the U.S. natural gas 5-year forward curve averaged $4.28/MMBtu, while international seaborne LNG was close to $20/MMBtu. Over the intermediate term, with the benefit of substantial global investment in infrastructure, we expect prices for U.S. and international natural gas to converge. We acquired our shares at an average price of $6.58. SWN shares ended the quarter at $7.17.”

1. Farfetch Limited (NYSE:FTCH)

Number of Hedge Fund Holders: 44

P/E Ratio as of March 29: 5.90

Farfetch Limited (NYSE:FTCH) is one of the best cheap penny stocks to invest in according to smart investors. The company operates a platform for the luxury fashion industry in the United States, the United Kingdom, and internationally. It has three segments – Digital Platform, Brand Platform, and In-Store. The company reported a revenue of $629 million in the fourth quarter of 2022, beating Wall Street estimates by $2.04 million. 

On March 24, JMP Securities analyst Nicholas Jones initiated coverage of Farfetch Limited (NYSE:FTCH) with a Market Perform rating and no price target. While Farfetch Limited (NYSE:FTCH) is a significant player in the personal luxury retail industry, the analyst believes that challenges in the upper funnel trends and low consumer savings rates may limit the company’s growth in the near future. Moreover, since China is driving most of the growth in the luxury retail industry, the analyst is looking for evidence that Farfetch Limited (NYSE:FTCH) is expanding its business in the country successfully. 

According to Insider Monkey’s fourth quarter database, 44 hedge funds were bullish on Farfetch Limited (NYSE:FTCH), compared to 50 funds in the prior quarter. Bill Miller’s Miller Value Partners is the biggest position holder in the company, with 6.85 million shares worth $32.4 million. 

Polen U.S. SMID Company Growth Strategy made the following comment about Farfetch Limited (NYSE:FTCH) in its Q4 2022 investor letter:

“Farfetch Limited (NYSE:FTCH) is an online marketplace for luxury goods. The stock was down -35% on the back of an investor day where management issued targets that implied decelerating growth. While this is a disappointing development in what has shaped into a disappointing year for the stock, we are maintaining our position with a focus on the long-term opportunity. Luxury fashion is still in a very nascent stage of migrating online. Farfetch—through partnerships and deep relationships it has built over many years— remains very well positioned to benefit from this trend.”

Insider Monkey focuses on uncovering the best investment ideas of hedge funds and insiders. Please subscribe to our free daily enewsletter to get the latest investment ideas from hedge funds’ investor letters by entering your email address below. You can also check out 17 Best Gambling Stocks to Buy Now and 11 Best Stocks to Buy on Robinhood for Beginners. 

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Disclosure: None. 12 Cheap Penny Stocks to Buy According to Hedge Funds is originally published on Insider Monkey.