On August 12, Jill Carey Hall, BofA Securities head of US small and mid-cap strategy, joined ‘The Exchange’ on CNBC to discuss the outlook for small caps, amidst their underperformance. Hall stated that she is cautious on small caps for several reasons since last year. One risk factor she cited is tariffs. Small-cap companies tend to have thinner profit margins, making their earnings more susceptible to the impact of tariffs, which she noted might be higher than many people expected. Another major reason for her cautious outlook is the Fed. She stated that Bank of America’s internal view is that the Fed will not be able to cut rates this year because inflation has remained sticky. Hall also discussed the earnings backdrop, which she described as showing green shoots but still being mixed. Last year, the consensus expectation was that small-cap earnings would recover faster and more substantially than large-cap earnings after being in a recession, but this has not yet happened. While small-cap earnings growth did turn positive this quarter, exceeding expectations, there are still lofty expectations for H2 of the year. Furthermore, top-line trends for small caps were much more lackluster compared to their large-cap counterparts.

Given her cautious view on small caps, the host asked what segments does she like. Hall said that it is important to be selective within the small and mid-cap universe. Overall, she favors mid-caps over small caps because they have cleaner balance sheets and are less exposed to risks like tariffs and refinancing. However, she believes there are still many opportunities within small caps. She highlighted that small caps offer wider performance spreads and more alpha opportunity, and that their valuations are relatively cheap compared to large caps, making it the least expensive size segment. She advised a selective approach, emphasizing that the Russell 2000 has become lower quality over time due to a higher number of non-profitable stocks. Therefore, she recommended focusing on higher-quality stocks within the small and mid-cap space, tilting toward mid-caps, and looking for companies with positive earnings revisions and stronger margins.

That being said, we’re here with a list of the 13 most promising penny stocks under $5.

Our Methodology

We sifted through the Finviz stock screener to compile a list of the most promising penny stocks that were trading below $5 as of August 15. We then selected the 13 stocks that were the most popular among elite hedge funds and that analysts were bullish on. The stocks are ranked in ascending order of the number of hedge funds that have stakes in them, as of Q1 2025.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 373.4% since May 2014, beating its benchmark by 218 percentage points (see more details here).

13 Most Promising Penny Stocks Under $5

13. Clear Channel Outdoor Holdings Inc. (NYSE:CCO)

Share Price as of August 15: $1.15

Number of Hedge Fund Holders: 31

Clear Channel Outdoor Holdings Inc. (NYSE:CCO) is one of the most promising penny stocks under $5. Earlier on July 22, TD Cowen lowered the firm’s price target on Clear Channel Outdoor to $1.60 from $1.70, while keeping a Buy rating on the shares. This sentiment by the firm came ahead of the company’s Q2 2025 results, with expectations for higher consolidated revenue and outperformance in the Airport segment to offset softness in the America segment.

Later in August, Clear Channel Outdoor Holdings’ consolidated revenue came out to be $402.8 million in Q2, which was a 7% improvement year-over-year. The America segment recorded its highest-ever second-quarter revenue at $303.1 million due to robust digital and local sales. The Airports segment also performed strongly, with a 15.6% increase in revenue, reaching $99.7 million, powered by growth in both national and local sales channels.

However, the company’s static advertising segment continues to lag behind digital growth. National sales in the America segment were also down 1% on a comparable basis. The company is still in the process of selling its business in Spain as well.

Clear Channel Outdoor Holdings Inc. (NYSE:CCO) is an out-of-home advertising company in the US and Singapore. The company operates in 2 segments: America and Airports.

12. Algoma Steel Group Inc. (NASDAQ:ASTL)

Share Price as of August 15: $4.64

Number of Hedge Fund Holders: 33

Algoma Steel Group Inc. (NASDAQ:ASTL) is one of the most promising penny stocks under $5. On July 31, RBC Capital lowered the firm’s price target on Algoma Steel to C$8 from C$10, while maintaining a Sector Perform rating on the shares. Prior to this decision, the company released its Q2 2025 earnings.

Algoma Steel Group reported a net loss of $110.6 million, which was a sharp contrast to the net income of $6.1 million in the prior year’s quarter. Adjusted EBITDA was a loss of $32.4 million, which reflected a negative margin of 5.5%. This was driven by a 10.5% year-over-year decline in steel revenue to $534 million, as well as lower steel shipments of 472,000 net tons, down 6.2% from the previous year.

The average net sales realization was $1,132 per ton, a decrease from $1,187 per ton in the prior year period, while the average cost per ton of steel products sold increased by 7% year-over-year to $1,144. A major factor contributing to the financial downturn was $64 million in direct tariff costs on outbound steel shipments to the US, which is a market now effectively closed to Canadian steel producers due to prohibitive tariffs. The company also reported ending the quarter with inventories valued at $736 million, a decrease from $800 million in the prior year quarter.

Algoma Steel Group Inc. (NASDAQ:ASTL) produces and sells steel products in Canada, the US, and internationally.

11. Butterfly Network Inc. (NYSE:BFLY)

Share Price as of August 15: $1.43

Number of Hedge Fund Holders: 33

Butterfly Network Inc. (NYSE:BFLY) is one of the most promising penny stocks under $5. On August 5, Butterfly Network announced advancements in AI-powered screening for aortic valve and aorta conditions. These developments include new research and the launch of a training tool called Butterfly ScanLab.

A study by Tufts Medical Center, published in the European Heart Journal – Imaging Methods and Practice, highlighted the potential of ML models to enable earlier detection of aortic stenosis/AS. The research showed that an ML model, when fine-tuned for use on Butterfly iQ+ handheld ultrasound devices, achieved an AUROC of 0.94 for differentiating between no aortic stenosis and any degree of the condition.

Aortic stenosis, which is a narrowing of the aortic valve, affects over 13% of Americans aged 75 and older and is often undiagnosed until it becomes advanced. Undiagnosed cases are associated with a higher risk of procedures, worse outcomes, and increased healthcare costs.

Butterfly Network Inc. (NYSE:BFLY) develops, manufactures, and commercializes ultrasound imaging solutions in the US and internationally.

10. Blend Labs Inc. (NYSE:BLND)

Share Price as of August 15: $2.86

Number of Hedge Fund Holders: 33

Blend Labs Inc. (NYSE:BLND) is one of the most promising penny stocks under $5. Earlier on July 16, Blend Labs and Doma Technology announced an expanded partnership to integrate Doma’s AI-powered instant title decisioning into Blend’s home lending platform. This collaboration brings Doma’s Upfront Title solution into Blend’s flagship Mortgage & Rapid Home Lending solutions and is designed to help lenders close loans faster and save borrowers a significant amount of money on title costs.

By embedding Upfront Title into the borrower application flow, the partnership creates a fully digital, end-to-end title and closing process. This allows lenders to obtain instant title decisions early in the process. The Upfront Title configuration also enables lenders to apply title insurance rates that can save borrowers between 40% and 70% compared to traditional rates.

This expansion aligns with Blend’s strategic shift towards providing software-driven title solutions through partnerships rather than operating those services directly. This move follows Blend’s recent definitive agreement to sell its title insurance business.

Blend Labs Inc. (NYSE:BLND) provides a cloud-based software platform for financial services firms in the US. It operates in 2 segments: Blend Platform and Title.

9. Clover Health Investments Corp. (NASDAQ:CLOV)

Share Price as of August 15: $2.66

Number of Hedge Fund Holders: 33

Clover Health Investments Corp. (NASDAQ:CLOV) is one of the most promising penny stocks under $5. On August 7, Canaccord lowered the firm’s price target on Clover Health to $4.10 from $4.50, while keeping a Buy rating on the shares. The firm said the company reported solid Q2 2025 results, but the insurance benefit expense ratio came in higher than expected, which was of some concern.

In Q2, the company’s Medicare Advantage membership grew by over 30% year-over-year, and the insurance revenue increased by 34% to $470 million. Clover Health Investments’ technology-first care model, which includes the Clover Assistant platform, showed a 15% reduction in hospitalizations and an 18% reduction in readmissions for patients with chronic obstructive pulmonary disease/COPD.

The company is now well-positioned for future growth with a 4-star payment year in 2026, which is expected to provide a financial tailwind. Clover Health is also expanding its technology platform to other risk-bearing entities, potentially opening up additional revenue streams.

Clover Health Investments Corp. (NASDAQ:CLOV) is a company that provides medicare advantage plans in the US. It operates Clover Assistant, which is a software platform to execute strategy by enabling physicians to detect, identify, and manage chronic diseases earlier than they otherwise could.

8. Altice USA Inc. (NYSE:ATUS)

Share Price as of August 15: $2.44

Number of Hedge Fund Holders: 35

Altice USA Inc. (NYSE:ATUS) is one of the most promising penny stocks under $5. On August 8, TD Cowen lowered the firm’s price target on Altice USA to $3 from $4, while maintaining a Buy rating on the shares. The firm stated that the company posted in-line revenue in Q2 2025 and discernible progress in Broadband subscriber KPIs.

In Q2, Altice USA’s total revenue saw a year-over-year decline of 4.2% to $2.15 billion. ~85% of this drop was due to video cord-cutting. The company’s net loss was $96.3 million, which was a reversal from the $15.4 million net income in Q2 2024. Despite these financial challenges, Altice USA’s gross margin expanded by 1.2% to 69.1%.

Broadband subscriber net losses were 35,000, which is a 31% improvement year-over-year, and video subscriber net losses of 58,000 represented the best trend in the last 10 quarters. The company ended the quarter with 663,000 fiber customers, which represented a 22% penetration rate of its fiber network. The company also saw an increase of 38,000 in mobile line net additions during the quarter, bringing the total number of mobile lines to 546,000.

Altice USA Inc. (NYSE:ATUS) provides broadband communications and video services under the Optimum brand in the US, Canada, Puerto Rico, and the Virgin Islands.

7. Aclaris Therapeutics Inc. (NASDAQ:ACRS)

Share Price as of August 15: $1.88

Number of Hedge Fund Holders: 35

Aclaris Therapeutics Inc. (NASDAQ:ACRS) is one of the most promising penny stocks under $5. On July 29, Aclaris Therapeutics announced positive top-line results from its Phase 2a clinical trial of ATI-2138. This is a potent and selective oral inhibitor of interleukin-2-inducible T cell kinase/ITK and Janus kinase 3/JAK3, which are both enzymes involved in immune responses.

The trial was an open-label, single-arm study conducted with 14 patients who had moderate-to-severe atopic dermatitis/AD. The company intends to further develop ATI-2138 for alopecia areata and other immuno-inflammatory diseases. The trial successfully achieved its primary and key secondary endpoints.

The primary endpoint, which focused on safety, confirmed that ATI-2138 has a favorable tolerability profile without the significant safety risks often associated with other JAK inhibitors. No severe adverse events/SAEs or treatment-emergent adverse events/TEAEs were observed. The efficacy results showed clinically meaningful improvements in disease severity.

Aclaris Therapeutics Inc. (NASDAQ:ACRS) is a clinical-stage biopharmaceutical company that develops novel drug candidates for immune-inflammatory diseases in the US.

6. Relay Therapeutics Inc. (NASDAQ:RLAY)

Share Price as of August 15: $3.53

Number of Hedge Fund Holders: 35

Relay Therapeutics Inc. (NASDAQ:RLAY) is one of the most promising penny stocks under $5. On August 8, Raymond James lowered the firm’s price target on Relay Therapeutics to $19 from $29, while keeping a Strong Buy rating on the shares. This sentiment followed Relay Therapeutics’ Q2 2025 results, where OpEx was down 16% sequentially following strategic cost-cutting initiatives.

Relay Therapeutics reported a net loss of $70.4 million, or $0.41 per share, in Q2 2025, which was an improvement compared to the net loss of $92.2 million, or $0.69 per share, in Q2 2024. Revenue for the quarter was $0.7 million, which was an increase from zero revenue in the same period last year.

This quarter also featured the initiation of the Phase 3 ReDiscover-2 trial for RLY-2608 in Q2 2025. At the 2025 American Society for Clinical Oncology/ASCO Annual Meeting, updated interim data from the Phase 1b study for RLY-2608 were presented. In addition to oncology, Relay Therapeutics is continuing to execute its ongoing Phase 1 clinical trial for vascular malformations.

Relay Therapeutics Inc. (NASDAQ:RLAY) is a clinical-stage precision medicines company that transforms the drug discovery process with a focus on enhancing small molecule therapeutic discovery in targeted oncology and genetic disease indications.

5. Iovance Biotherapeutics Inc. (NASDAQ:IOVA)

Share Price as of August 15: $2.60

Number of Hedge Fund Holders: 37

Iovance Biotherapeutics Inc. (NASDAQ:IOVA) is one of the most promising penny stocks under $5. On August 8, Wells Fargo lowered the firm’s price target on Iovance Biotherapeutics to $14 from $18, while keeping an Overweight rating on the shares. While the stock reacted negatively after-hours to Q2 2025 results, the firm pointed out that the revenue miss was mainly due to IL-2, with Amtagvi meeting consensus.

Iovance Biotherapeutics’ total revenue for Q2 was $60 million, which was a 93% increase year-over-year and a 22% sequential growth. This was driven by the company’s cell therapy, Amtagvi, which generated $54.1 million in sales. Proleukin, another of the company’s products, contributed an additional $5.9 million in product revenue.

The company successfully treated over 100 patients with its Amtagvi therapy for advanced melanoma, a first for the company in a single quarter. Real-world data from authorized treatment centers showed a nearly 49% response rate among patients treated with Amtagvi, with the response rate rising to 61% in patients who had received two or fewer prior lines of therapy.

Iovance Biotherapeutics Inc. (NASDAQ:IOVA) is a commercial-stage biopharmaceutical company that develops and commercializes cell therapies using autologous tumor-infiltrating lymphocytes for the treatment of metastatic melanoma and other solid tumor cancers in the US.

4. Lumen Technologies Inc. (NYSE:LUMN)

Share Price as of August 15: $4.47

Number of Hedge Fund Holders: 39

Lumen Technologies Inc. (NYSE:LUMN) is one of the most promising penny stocks under $5. On August 13, Lumen Technologies announced that its Network-as-a-Service/NaaS platform had reached a significant milestone, surpassing 1,000 customers. The company highlighted this achievement as a sign of the increasing demand for a new and programmable enterprise network designed for the AI economy.

Launched at the end of 2023, the Lumen NaaS platform is a suite of services that allows businesses to get instant and on-demand resources with advanced networking technologies. This includes Internet On-Demand for public connectivity, Ethernet On-Demand for Layer 2 private connectivity, and IP VPN On-Demand for Layer 3 private connectivity.

The platform also offers security features like DDoS Essentials for attack protection and Lumen Defender, powered by Black Lotus Labs, to block malicious traffic. The company was recognized as the 2024 NaaS Service Provider of the Year in North America by MPLIFY (formerly MEF). The Lumen NaaS platform is built on one of the world’s most expansive and deeply interconnected networks, which features approximately 163,000 on-net buildings and 340,000 global fiber route miles.

Lumen Technologies Inc. (NYSE:LUMN) is a networking company that provides integrated products and services to business and mass customers in the US and internationally.

3. Rocket Pharmaceuticals Inc. (NASDAQ:RCKT)

Share Price as of August 15: $3.12

Number of Hedge Fund Holders: 40

Rocket Pharmaceuticals Inc. (NASDAQ:RCKT) is one of the most promising penny stocks under $5. On July 24, Rocket Pharmaceuticals announced a strategic corporate reorganization and pipeline prioritization to focus its resources on its adeno-associated virus/AAV cardiovascular platform and the regulatory submission for KRESLADI (formerly RP-L201) for severe leukocyte adhesion deficiency-I/LAD-I.

The company is implementing a workforce reduction of ~30%. This, along with other cost-saving measures, is expected to decrease Rocket’s 12-month operating expenses by ~25%. As a result, the company anticipates that its current cash resources will fund operations into Q2 2027.

This estimate does not account for any potential proceeds from a Priority Review Voucher, which may be granted upon the FDA approval of KRESLADI. As part of this realignment, the company anticipates delays in the Fanconi Anemia (FA; RP-L102) and Pyruvate Kinase Deficiency (PKD; RP-L301) programs, with FDA approval for RP-L102 no longer expected in 2026.

Rocket Pharmaceuticals Inc. (NASDAQ:RCKT) operates as a late-stage biotechnology company that focuses on developing gene therapies for rare and devastating diseases in the US.

2. Alight Inc. (NYSE:ALIT)

Share Price as of August 15: $3.67

Number of Hedge Fund Holders: 41

Alight Inc. (NYSE:ALIT) is one of the most promising penny stocks under $5. On July 28, Alight announced the second major release of Alight Worklife for the year. This update introduces AI-powered enhancements, deeper integrations, and greater personalization to simplify benefits management for employees and reduce complexity for HR teams.

The latest release includes enhancements across 5 key areas: health, leaves, wealth, support, and wellbeing. A 2024 Forrester study found a 112% ROI for a global company using Alight Worklife. New self-service tools and AI integrations streamline benefits access. AI-generated summaries provide faster, more relevant responses to employee queries, reducing time spent on administrative tasks.

An expanded programs library now offers access to over 425 benefits program pages, with more than 100 new detail pages added. Additionally, a Smart-Choice Accounts digital wallet integration allows for secure, contactless payments using Apple Pay and Google Wallet.

Alight Inc. (NYSE:ALIT) is a technology-enabled services company that provides Alight Worklife, which is an intuitive and cloud-based employee engagement platform.

1. Geron Corporation (NASDAQ:GERN)

Share Price as of August 15: $1.45

Number of Hedge Fund Holders: 41

Geron Corporation (NASDAQ:GERN) is one of the most promising penny stocks under $5. On August 6, Geron Corporation announced the appointment of Harout Semerjian as its new President and Chief Executive Officer, effective the following day.

He succeeded Dawn Carter Bir, who has served as Interim President and CEO since March 2025. Bir will remain on the Board of Directors. Semerjian brings over 30 years of commercial hematology and oncology experience to Geron. His career includes leadership roles at Novartis, where he spent 17 years and served as global lead for Gleevec and KISQALI and head of the US hematology franchise.

This appointment comes at a crucial time for Geron, as the company is focused on expanding access to its recently approved product, RYTELO (imetelstat). RYTELO is approved in the US and the European Union for treating certain adult patients with lower-risk myelodysplastic syndromes with transfusion-dependent anemia. The company is also advancing its pipeline, including the pivotal Phase 3 trial /IMpactMF for imetelstat in relapsed/refractory myelofibrosis.

Geron Corporation (NASDAQ:GERN) is a commercial-stage biopharmaceutical company that focuses on the development of therapeutic products for oncology.

While we acknowledge the potential of GERN to grow, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and have limited downside risk. If you are looking for an AI stock that is more promising than GERN and that has 100x upside potential, check out our report about this cheapest AI stock.

READ NEXT: 30 Stocks That Should Double in 3 Years and 11 Hidden AI Stocks to Buy Right Now.

Disclosure: None. Insider Monkey focuses on uncovering the best investment ideas of hedge funds and insiders. Please subscribe to our free daily e-newsletter to get the latest investment ideas from hedge funds’ investor letters by entering your email address below.