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.