We recently compiled a list of the 10 Oversold Penny Stocks To Invest In Now. In this article, we are going to take a look at where Ultrapar Participacoes (NYSE:UGP) stands against the other Oversold Penny Stock To Invest In Now.

Penny stocks offer some of the best investment opportunities for risk-tolerant investors. While most double up as high-risk, high-reward investment plays, they offer a way of diversifying an investment portfolio at highly discounted valuations.

Since penny stocks are primarily of smaller companies in the early stages of growth, they can be highly speculative and volatile. Likewise, they offer a way of gaining exposure to emerging technologies, products, and services likely to shape the world.

READ ALSO: 10 Worst Performing Blue Chip Stocks in 2024 and 10 Worst Performing NASDAQ Stocks in 2024.

While the overall stock market has been bullish, depicted by the S&P 500 flirting with record highs after a 21% gain year to date, some penny stocks have been under immense pressure. Some have shed more than 30% in market value on investors reacting to their deteriorating fundamentals owing to a challenging macroenvironment.

The challenging macro environment that has seen the global economy come under pressure, depicted by China initiating stimulus measures and the US embarking on interest rate cuts, has forced some investors to question some penny stocks’ long-term prospects. The uncertainty over the upcoming US election has also fuelled volatility, resulting in a significant selloff.

High interest rates were intended to cool inflation by containing a heating U.S. economy. So far, it has worked: According to the annual rate of the consumer price index, inflation has decreased from a peak of 9.1% in June 2022 to 2.4% in September 2024.

“We’ve raised rates a lot, and the US economy has basically absorbed them and still continues to perform quite well,” Minneapolis Federal Reserve President Neel Kashkari said on October 21, 2024. That indicates “the neutral rate seems to be higher” at this point, Kashkari added.

Billionaire hedge fund manager Paul Tudor Jones’s warning of the current government fiscal deficit and increased spending by both presidential candidates also adds to a wave of uncertainty in the market.

“We’re going to be broke really quickly unless we get serious about dealing with our spending issues,” Jones told CNBC’s Andrew Ross Sorkin on October 10, 2024

According to Tudor, increased government spending could trigger a selloff in the bond market, resulting in a significant spike in interest rates.  Higher interest rates don’t bode well with penny stock companies, as most are always looking for ways to access cheap capital to accelerate their growth plans.

The International Monetary Fund has shared similar sentiments, which have warned that the global economy faces the risk of plunging into recessions on rising geopolitical risks and weaker long-term growth fuelled by the high interest rate environment.

“The global battle against inflation is almost won,” the IMF report says while pushing for a policy triple pivot” to address interest rates, government spending and reforms and investment to boost productivity.

“Despite the good news on inflation, downside risks are increasing and now dominate the outlook,” said IMF chief economist Pierre-Olivier Gourinchas.

Amid the growth concerns, the US economy is projected to grow much faster owing to robust artificial intelligence-related investments. The US Federal Reserve cutting interest rate by 50 basis points is already impacting steering the economy into a soft landing, which should be accommodative for penny stocks.

That said, now would be the best time to take a look at the best-oversold penny stocks to invest in now as solid underlying fundamentals back most. The stocks promise to generate significant returns down the road as macroeconomics improve.

Our Methodology

To compile our list of the Oversold Penny Stocks To Invest In Now, we started by gathering stocks trading below $5, down by more than 30% for the year and with a forward price-to-earnings multiple of less than 15. We then filtered these stocks based on their share price drops as of October 25, creating a list of 10 companies. Finally, we ranked these companies in ascending order according to the number of hedge funds that hold stakes.

At Insider Monkey, we are obsessed with 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).

Ultrapar Participacoes (NYSE:UGP)

Year to Date Gain as of October 25: -32.96%

Forward Price to Earnings Ratio: 8.58

Number of Hedge Fund Holders: 10

Headquartered in São Paulo, Brazil, Ultrapar Participacoes (NYSE:UGP) is an energy company that distributes liquefied petroleum gas to residential, commercial and industrial consumers.  While down by about 33% for the year, it is turning out to be one of the oversold penny stocks to invest in now.

The company has been firing on all cylinders, as evidenced by the solid second-quarter results that affirm underlying growth. Net income in the quarter was up 106% to BRL491 million, resulting in an 85% increase in accumulated net income for the year to BRL947 million. Ultrapar Participações S.A. achieved a 3% growth in EBITDA growth due to increased capacity occupancy.

Consequently, Ultrapar Participacoes (NYSE:UGP) reiterated its commitment to returning value to shareholders by approving a payment of BRL276 million in interim dividends for the first half of 2024, reflecting strong financial performance. As it stands, Ultrapar Participações S.A. is a solid investment play for income-focused investors as the stock yields 3.42% in dividends.

Ultrapar Participacoes (NYSE:UGP) trades at a significant discount with a price-to-earnings multiple of 8.58. With oil prices supporting above the $70-a-barrel level amid escalating geopolitics in the Middle East, it is a solid penny stock investment for gaining exposure in the energy sector.

Insider Monkey’s second quarter of 2024 survey of 912 hedge funds revealed that 10 had bought and owned Ultrapar Participacoes (NYSE:UGP)’s shares. In the same quarter, its biggest hedge fund investor was Jim Simons’ Renaissance Technologies due to its $9.58 million stake.

Here is what Third Avenue Management Value Fund has to say about Ultrapar Participações S.A. (NYSE:UGP) in its Q1 2022 investor letter:

“Ultrapar is a Brazilian fuel distribution and storage business. Operating under the Ipiranga brand name, Ultrapar is one of three companies with dominant fuel distribution networks in Brazil. With more than 7,000 service stations, Ipiranga holds an approximate 19% market share in Brazilian vehicle fuel distribution and also operates a related convenience store business under the AmPm brand. Ultrapar also operates one of Brazil’s largest Liquefied Petroleum Gas (“LPG”) distribution businesses as well as one of Brazil’s largest bulk liquids storage terminal networks. The Brazilian equity market has, in recent years been a relatively poor performer, particularly as measured in U.S. dollars. Ultrapar is one example of a relatively high quality Brazilian business that is currently available at valuation levels we haven’t seen in some time. Additionally, like many businesses in Brazil, the fuel distribution business has a few country-specific complexities. In the main, we would say that the overall direction of policy in Brazil has made operating the business more straightforward and the separation of several businesses in the energy storage and distribution arena from state-controlled Petrobras is gradually allowing the industry to operate in a more traditional arms-length manner. Further, as it relates to Ultrapar specifically, in recent years, it is generally accepted that Ipiranga has been the least well operated of the big three fuel distributors. This is most glaringly evidenced by routinely inferior fuel distribution margins. Ultrapar also spent years making ill-advised acquisitions in an attempt to diversify, a process which is currently being put into reverse. The disposition of several large but noncore businesses has led to a substantial cash inflow recently, putting Ultrapar on excellent footing to make operational improvements and, potentially, to make strategic additions to its business. This strategy will be executed by a new CEO, to whom Ultrapar’s controlling family has made a considerable financial commitment. We have high-regard for the new CEO, having familiarity with him from his previous career at Cosan S.A., another one of Brazil’s big three fuel distributors. In summary, we think that there is a lot of room for operational improvement as well as general valuation upside at Ultrapar.”

Overall, UGP ranks 7th on our list of 10 Oversold Penny Stocks To Invest In Now. While we acknowledge the potential of UGP as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than UGP, check out our report about the cheapest AI stock.

READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock

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