Penny stocks are very risky to invest in, mainly due to the fact that many of these companies are trading over the counter and usually don’t provide a lot of information to investors. However, there are also stocks that are priced below $1 per share trading on bigger exchanges and there could be a number of reasons why they are priced so low. For example, after oil prices dropped, many energy stocks lost a lot of ground and many small-cap companies saw their valuation dwindle. Since oil price fluctuations are usually cyclical, it’s often the case that many cheap oil stocks are actually good bargains and are poised to grow once oil prices rebound. Another reason why a stock can slid into penny-stock territory is a one-time event that affected the company’s performance or prospects, which led to investors heading to the exits. While sometimes an event like this could represent an eventual bankruptcy of the company, at other times the stock may drop due to a simple overreaction and a closer analysis may also reveal that the stock is deeply undervalued.
Nevertheless, there are thousands of penny stocks trading even on larger exchanges, so it can be really difficult for someone to find a bargain among them. Here’s where our research comes in handy. We track over 700 hedge funds and other institutional investors and by analyzing their quarterly 13F filings with the Securities and Exchange Commission, we can determine how many funds held long positions in an individual stock. This is useful, because the investors we follow are some of the best-skilled stock pickers on the Street and employ significant resources in identifying undervalued companies and opportunities that may be missed by the broader market due to the possible underlying risk. With this in mind, below we are going to take a closer look at five penny stocks that ranked as the most popular among the investors we track. It’s important to point out that even though some of these stocks weren’t penny stocks last quarter, they are still worth taking a closer look at since smart money investors usually buy stocks with long-term potential.
At Insider Monkey, we’ve developed an investment strategy that has delivered market-beating returns over the past 12 months. Our strategy identifies the 100 best-performing funds of the previous quarter from among the collection of 700+ successful funds that we track in our database, which we accomplish using our returns methodology. We then study the portfolios of those 100 funds using the latest 13F data to uncover the 30 most popular mid-cap stocks (market caps of between $1 billion and $10 billion) among them to hold until the next filing period. This strategy delivered 39.7% gains over the past 12 months and outperformed the 24.1% gain enjoyed by the S&P 500 ETFs. Our enhanced small-cap hedge fund strategy returned more than 45% over the last 12 months and outperformed SPY by more than 30 percentage points over the last 4.5 years (see details here).
In PharmAthene, Inc. (NYSEMKT:PIP), a $46 million biodefense company, eight investors in our database held roughly 17.60% of its outstanding stock heading into 2017, up from six funds a quarter earlier. It should be mentioned that the stock dropped to penny-stock territory just last month, when PharmAthene, Inc. (NYSEMKT:PIP) paid a special dividend of $2.91 per share. The dividend was part of the company’s plan to return some $200 million it obtained following its litigation with SIGA over its smallpox antiviral Arestvyr. During the fourth quarter, billionaire Jim Simons‘ Renaissance Technologies boosted its stake in PharmAthene, Inc. (NYSEMKT:PIP) by 2.83 million shares to 3.35 million shares.
Then there’s Ocera Therapeutics Inc (NASDAQ:OCRX), in which the number of funds long the stock stood unchanged at nine as of the end of the fourth quarter. However, the aggregate value of their holdings dropped to $11.99 million from $15.14 million and represented some 24.70% of its float at the end of 2016. Only three years ago, Ocera’s stock was trading north of $16 per share, but lost ground as the company’s lead product for the treatment of hepatic encephalopathy (HE) had some difficulties along the road. At the end of January, the stock plunged from around $2.00 per share to below $1.00, after Ocera Therapeutics Inc (NASDAQ:OCRX) announced that its lead candidate failed to beat a placebo in terms of time to improvement in HE symptoms. Dan Gold’s QVT Financial reported ownership of some 906,300 shares of Ocera Therapeutics Inc (NASDAQ:OCRX) in its latest 13F filing.
On the next page, we will take a closer look at two energy penny stocks and one tech penny stock that have captured the attention of smart money investors.