Hot Penny Stocks on the Rise: Top 3 to Watch in May 2015

Hot Penny StocksAs of May 2015, what penny stocks have been on the rise? Before we get to the answer to that question, let’s go over some of the nitty-gritty. First of all, I define penny stocks as those with an inexpensive share price and a market capitalization of under $2.0 billion.

I urge the readers of these pages to always do their own research. Looking for rising penny stocks starts with looking for businesses with strong balance sheets, rising revenues, positive earnings, and a focused management team.

Now, to those top three penny stocks to watch this month!

PDF Solutions Inc. (NASDAQ/PDFS)

Founded in 1992, and with a market cap of $523 million, PDF Solutions Inc. is a technology-focused company that provides solutions to chip makers during the design and manufacturing process.

A major revenue-driving product consists of “Characterization Vehicle” test chips, which are used by manufacturers to test their chips. PDF Solutions also markets the “Exensio” platform, which is used by chip makers to improve yields and chip quality during the production stage by monitoring any faults in the chips.

As of 2014 year-end, International Business Machines Corporation (NYSE/IBM) and Samsung Electronic accounted for 52% and 16% of total revenues, respectively.

Throughout its operating history, PDF Solutions has reported inconsistent revenue and earnings results. But the firm’s cash balance has steadily grown, while debt levels remain low. Cash equivalents grew from $38.0 million in 2010 to over $115 million by 2014. Long-term debt obligations decreased from $5.0 million in 2010 to $3.2 million in the same period. (Source: PDFS 10K, March 3, 2015.)

DeeThree Exploration Ltd. (TSE/DTX)

With a market cap of $638 million, DeeThree Exploration Ltd. is an oil-focused producer operating in the western Canadian sedimentary basin. The management team was able to increase revenue from $33.0 million in 2011 to over $300 million by 2014 year-end.

The price environment remains challenging for oil producers globally, but DeeThree Exploration’s management reiterated its production growth guidance for 2015. As of March 25, 2015, DeeThree expects to grow production by 18% to 13,300 barrels of oil equivalent per day (boe/d); significantly higher than the 11,300 boe/d and 7,100 boe/d produced in 2014 and 2013, respectively.

Something to watch out for, currently common with many oil producers, is that debt levels increased from $88.0 million in 2013 to about $140 million by the 2014 fiscal year-end. The debt facility has a borrowing limit of $310 million and will likely be used to finance DeeThree’s capital budget.

I believe this debt level is manageable as DeeThree Exploration churned out $184 million in operating cash flow during 2014 and also has the option of reducing its capital spending, if commodity prices remain weak. Moreover, based on DeeThree management estimates of $65.00 and $80.00 oil prices for 2015 and 2016 respectively, the shares are worth $8.75. (Source: DTX Annual Report, March 25, 2015.)

Sandstorm Gold Ltd. (NYSE/SAND)

Sandstorm Gold Ltd., with a market cap of $405 million, does not explore for gold itself. Rather, it finances gold mining projects with an agreement called “streaming.” In return for providing the financing, Sandstorm receives a portion of a mine’s production at a fixed cost. Sandstorm also has royalty agreements in which it receives a portion of total revenues from a mine.

Net income earned has been volatile—jumping from negative $74.0 million in 2013 to $12.0 million by 2014 year-end. But Sandstorm has stayed the course and increased the number of streaming and royalty agreements from a total of 35 in 2013 to 46 by 2014. (Source: SAND Annual Report, last accessed May 5, 2015.)

Many of the royalty and streaming contracts are arranged so that Sandstorm receives gold at far below the spot price. As a result, the companies cash cost per ounce is $321.00—that’s 73% below the current spot price of $1,187. To survive the current downturn in gold, Sandstorm has a buffer $90.0 million in cash and cash equivalents, with no debt on its balance sheet. (Source: SAND Annual Report, last accessed May 5, 2015.)

Warning on the Risks of Penny Stocks

All investors looking to find the best penny stocks should always do their own research. Moreover, the price of all stocks, especially penny stocks, can move quickly and opposite to the expected direction. Risk-averse investors and those without an opportunity to perform detailed research should stay away.