We recently compiled a list of the 12 Cash-Rich Penny Stocks To Buy According To Hedge Funds. In this article, we are going to take a look at where Prospect Capital Corporation (NASDAQ:PSEC) stands against the other cash-rich penny stocks.
Shares priced under $5, commonly referred to as penny stocks, are a tempting bet for investors chasing big returns with minimal upfront investment. They typically come from smaller companies worth less than $300 million and are known for their wild price swings, low liquidity, and high risk. While they can deliver massive gains, they are just as likely to lead to steep losses due to limited financial data and unpredictable price movements. Speculative investors are drawn to them, but smart investing means balancing these high-risk picks with more stable assets.
Sometimes these stocks are undervalued, offering early investors a shot at big rewards if the company takes off. For example, many investors regret not buying up shares of Jeff Bezos’ e-commerce giant when the company went public in 1997, with shares priced under $2. By 1998, it had already shed its penny stock label, and the last time it dropped under $100 was back in 2009. Similarly, investors lament not picking up the iPhone maker’s shares back in 2003, when it was trading at $6.56 and almost a penny stock.
Penny stocks typically come from small-cap and mid-cap companies, which have historically delivered higher returns than large-cap stocks due to their growth potential and higher risk. However, in recent years, these smaller companies have struggled to keep up, as large-cap stocks, especially tech giants, have significantly outperformed. One primary reason is the shifting composition of major stock indices. The broader market’s dominance by a few mega-cap companies has skewed overall market performance. If the Magnificent Seven stocks were excluded each year, the market’s lead over the small-cap Russell would shrink considerably.
Small-cap stocks ended 2024 with their second consecutive positive quarter, rising 0.3% in the fourth quarter, as reported by Royce Investment Partners. However, they still could not keep up with large-cap stocks, as the Russell large cap index gained 2.7%. Despite some volatility, small-cap stocks reached a new high in late November, more than three years after their last peak, making it one of the longest recovery periods in the index’s history. In 2025, market volatility is expected to return to normal levels. But instead of seeing it as a threat, long-term investors view volatility as an opportunity. History shows that after periods of high market turbulence, small-cap stocks often deliver stronger returns than their large-cap counterparts. Keeping that in mind, let’s take a look at some cash-rich penny stocks which are Wall Street favorites as well.
Our Methodology
For this article, we used the Finviz stock screener to find penny stocks with strong cash reserves. We filtered for companies with stocks priced under $5 and a current ratio (CR) above 2, which indicates they have more assets than liabilities, due to high cash reserves, receivables, or inventory. After that, we manually looked for companies with a trailing twelve-month (TTM) operating cash flow of over $20 million as of December 31, 2024 and picked 12 stocks with the highest cash reserves. We also included hedge fund sentiment as of Q4 2024 and we’ve ranked the list in ascending order of the number of hedge fund holders in each firm.
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).
A vibrant high-tech office space, representing the company’s later stage investments.
Prospect Capital Corporation (NASDAQ:PSEC)
TTM Operating Cash Flow as of December 31, 2024: $557,725,000
Number of Hedge Fund Holders: 10
Share Price as of March 4: $4.35
Prospect Capital Corporation (NASDAQ:PSEC) is a business development company that invests in middle-market and later-stage businesses. The company specializes in different types of financing, including secured loans, mezzanine debt, private equity, and real estate. Its diversified portfolio spans industries like manufacturing, energy, healthcare, and media. On January 31, 2025, the company announced that it invested $65 million in Taos Footwear through a mix of senior secured loans and preferred equity. Taos is a well-known brand for stylish and supportive footwear. Prospect’s managing director, Robert Melman, stated that PSEC is excited about backing a brand with a strong customer base and innovative products. It is one of the best cash-rich stocks to invest in.
In the December quarter, PSEC’s interest income accounted for 91% of total investment income, demonstrating a strong recurring revenue profile. Payment-in-kind income declined to $20 million, down 39% from the prior quarter and nearly 50% from June 2024. The company has long-term debts that will be paid off over the next 27 years. It has promised $62 million in future investments, but $29 million of that can be decided at its own discretion. As of December 2024, Prospect Capital Corporation (NASDAQ:PSEC) had $1.9 billion in available cash and credit, and $4.8 billion of its assets were free from any debt or obligations.
According to Insider Monkey’s Q4 data, 10 hedge funds were bullish on Prospect Capital Corporation (NASDAQ:PSEC), compared to 5 funds in the last quarter. Dmitry Balyasny’s Balyasny Asset Management was the leading stakeholder of the company, with 2.4 million shares worth $10.6 million.
Overall PSEC ranks 12th on our list of the best cash-rich penny stocks to buy. While we acknowledge the potential of PSEC as an investment, our conviction lies in the belief that certain AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than PSEC but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 20 Best AI Stocks To Buy Now and Complete List of 59 AI Companies Under $2 Billion in Market Cap.
Disclosure: None. This article is originally published at Insider Monkey.