We recently compiled a list of the 11 Penny Stocks That Will Make You A Millionaire. In this article, we are going to take a look at where BigBear.ai Inc. (NYSE:BBAI) stands against the other penny stocks.

Why Should You Invest in Penny Stocks?

Penny stocks are often overlooked by most investors. These are the smallest of the small companies operating in the market, and so they typically lose out on being covered in detail by financial reporters and analysts. However, because of this conundrum, many penny stocks end up becoming excellent under-the-radar investments for those investors who don’t mind a bit of risk. This is especially the case for penny stocks operating in the artificial intelligence space today. This isn’t to say that penny stocks offer a sure-shot way of making big profits at all times, though. Since these stocks are of companies that are incredibly small relative to the usual players we hear about in the market news, they are also incredibly risky to invest in – as such, investing in penny stocks is a move that only investors with a tolerance for high-risk, high-reward strategies should make.

In the current market landscape, there may be more room to consider investing in smaller companies. This is because of the potential September rate cut from the Fed. Financial professionals are considering this potential cut to be a catalyst for the growth of smaller companies in the market, which have been largely left ignored over the past two years since the Fed’s policy has been so tight. So a rate cut in September may actually result in an overall growth cycle emerging for smaller players in the market.

Read Also: 7 Most Popular AI Penny Stocks Under $5 and 10 Best Technology Penny Stocks to Invest In Right Now.

How’s The Market Looking For Smaller Stocks Today?

On August 21, Tom Lee, co-founder of Fundstrat Global Advisors, joined CNBC’s “Closing Bell Overtime” to discuss this very development. He noted that as the Fed is starting to normalize its policy and as merger activity in the US is beginning to accelerate, smaller companies are becoming increasingly more poised to benefit. Lee also added that there’s a misconception in the market that smaller companies are growing, or at least have the tendency to, grow slower than bigger companies. In fact, he noted that the small cap index has a median earnings growth that is almost 700 basis points faster than the broader market index, while top-line growth is almost 400 basis points faster. Lee also said the following:

“For small caps to rise 40% means that the P/E, the median Russell 2000 stock goes from 10x to 14x. So, it’s not asking the market to provide some magic and a huge re-evaluation… [With small-caps] you’re getting better growth, lower valuation, and I think the catalyst is now that the market is convinced that the Fed is embarking on a rate cutting cycle.”

According to Lee, money that’s been on the sidelines over the past few years because of the Fed’s rate policy could now potentially funnel into smaller companies because they offer a good risk-reward balance to investors now. Because of these developments, we’ve compiled a list of some of the smallest stocks trading on the market today by going through five months’ worth of articles on Stock Gumshoe, a financial analysis website that offers unique insights into what some call “secret stocks,” which have been going largely ignored by most investors.

Our Methodology 

We read Stock Gumshoe articles from April to August of 2024 and then selected the penny stocks that have promising futures ahead of them. The stocks are ranked in ascending order of the number of hedge funds holding stakes in them as of the end of the second quarter of 2024, according to Insider Monkey’s hedge fund data.

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 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).

BigBear.ai Inc. (NYSE:BBAI)

Number of Hedge Fund Holders: 9

BigBear.ai Inc. (NYSE:BBAI) is an information technology company based in Columbia, Maryland. It provides AI-powered decision intelligence solutions alongside national security, supply chain management, and digital identity solutions.

Dylan Jovine, in his Behind the Markets newsletter, has teased readers with hints about three small AI players in the defense market. Here are some of his comments on one of these companies and its AI software that is being bought up by major defense companies and the US government:

“It’s not just about selling this AI software to the U.S. Space Force. Remember, the U.S. Pentagon has requested $145 billion to get its troops “AI-ready”… Palantir – one of the biggest defense contractors – bought their AI software on November 15, 2021. L3Harris – another major defense contractor – bought their AI software on May 9, 2023… Amazon Web Services – the biggest cloud computing provider on the planet – bought their AI software on December 11, 2023.”

Stock Gumshoe thinks that this is most definitely in reference to BigBear.ai Inc. (NYSE:BBAI). The company does have partnerships and deals with all of the companies Jovine has referred to and has multiple steady government contracts for the use of its AI software.

While many analysts and investors are skeptical about BigBear.ai Inc.’s (NYSE:BBAI) potential growth, the company’s management has remained optimistic, especially in light of its acquisition of Pangiam. BigBear.ai Inc.’s (NYSE:BBAI) management also noted in their first quarter press release that the company is well-positioned for healthy growth in the year ahead.

We saw nine hedge funds long BigBear.ai Inc. (NYSE:BBAI) in the second quarter, with a total stake value of $408,000.

Overall BBAI ranks 5th on our list of the penny stocks that will make you a millionaire. While we acknowledge the potential of BBAI as an investment, our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than BBAI but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article is originally published at Insider Monkey.