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Capstone Turbine Corporation (CPST) and Seadrill Ltd (SDRL) Among Hedge Funds’ Favorite Penny Stocks

New and inexperienced investors are usually advised to stick to index funds, or ETFs at the beginning, and if they want to venture into individual stocks they should look at value rather than growth investing (see here why). However, there is one group of stocks that looks particularly interesting to beginners: penny stocks. Penny stocks is the common name for companies whose shares is trading at below $1 and that’s why they look very enticing. Penny stocks allow investors to hold large amounts of shares at a low initial investment and there is a small chance to reap very high returns, when a gain of just a few cents per share can translate into huge percentage returns.

However, penny stocks are extremely risky and are usually considered speculative investments. Moreover, the bulk of penny stocks is trading on over-the-counter market where companies are less regulated and are not required to register with the Securities and Exchange Commission. Less regulation and lack of disclosure means that companies don’t always have to be truthful about their performance and the market is often used by scammers. Given that a gain of just a few cents translates into big percentage gains, the opposite is also true, so it’s very easy to lose all or almost all invested capital very quickly. Nevertheless, there are also many stocks that are trading below $1 per share on major exchanges.

So, if you understand the risk and have the courage and patience to invest in penny stocks, you have to pick the right approach. Generally, penny stocks that are trading over-the-counter are best for day trading or swing trading (when a position is held for several days). Investing in over-the-counter penny stocks for the long run requires a lot of research and a lot of luck, because you will be taking your chances with the company and hoping that the information it discloses is accurate. Therefore, for long-term investing, it’s better to stick with penny stocks that are trading on major exchanges.

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Pixabay/Public Domain

But even on major exchanges, there are many stocks to chose from and there are still many risks involved. So, the next logical step is to identify why the stock price has slid below the $1 threshold and whether the company has a chance to rebound. And here’s where our research may come in handy. Before looking at each company’s results, you might want to take a look at the penny stocks that smart money invest in. Hedge funds and other institutional investors are very large and usually invest in big companies. However, there are also many penny stocks that these investors hold, although given their size, they can afford the risks. Nevertheless, they thoroughly research each company they invest in, so if they chose to own a penny stocks, it’s worth taking a look at them.

At Insider Monkey, we follow over 650 hedge funds and compile data from their quarterly 13F filings to get an idea about their collective sentiment towards thousands of stocks. We use the data to identify the best stocks to outperform the market using our proprietary methodology that takes into account small-cap stocks that the best-performing hedge funds are collectively bullish on (see more details here). At the same time, we can look at other groups of stocks and, in this case, we have selected five stocks that are trading under $1 that have the most investors from our database holding their shares.

Head to the next page to see what are five of hedge funds’ favorite stocks.