Two Top Penny Stocks for 2016
Despite the massively inflated stock bubble of recent years, there are some penny stocks that remain highly undervalued. Two of the clearest examples are Sirius XM Holdings Inc. (NASDAQ:SIRI) and Linn Energy, LLC (NASDAQ:LINE). And here’s the kicker: both stocks are trading under $5.00.
Linn Energy’s stock price is currently hovering at $3.01 per share. The company has had an extremely dark year, falling just over 70% since the start of January. The Houston-based oil and natural gas company is being dragged lower by falling oil prices, but investor sentiment may be rounding the corner soon.
Meanwhile, Sirius XM stockholders have seen their shares appreciate by 10% this year. SIRI stock is sitting at a comfortable $3.85 per share at the time of writing, but there could be more room for the stock to run.
We’ve seen some clever moves by Sirius XM’s management in recent weeks that give me hope.
One Hit Penny Stock to Watch in 2016
Economists tell us the stock market is driven by rationality. That people act logically and the sum of their individual actions results in a fair pricing of stocks and bonds. But we know that isn’t always true.
Human beings are susceptible to “groupthink.” And certain opinions can become fashionable. If markets were perfectly efficient, no one would make much money investing in stocks. That’s why it’s profitable to look at penny stocks, where there is less competition.
Investing isn’t just about picking great stocks. It’s also about knowing which ones are trading at a discount to their true value. Think of the last time everyone told you Company X was a dud, after which the stock immediately soared.
Swimming against the tide is a lonely business. But it’s how investors get rich.
Linn Energy could be one such penny stock. LINE stock has been battered by the market since crude oil prices collapsed. Investors loved the company during the shale boom years, when America’s oil and gas industry was revolutionized by new and innovative technology.
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As a “limited liability corporation,” Linn Energy had to pay out its earnings as distributions. The firm’s cash flow was badly wounded by the slump in crude oil, forcing Linn to accept a net loss. That’s when the vultures came out.
Short sellers began to prey on oil and natural gas companies that fell from grace, scaring away other investors who couldn’t suffer further losses. Long story short; the market fell out of love with Linn Energy, pushing this penny stock into a death spiral.
Is There Big Upside Ahead for These Hot Penny Stocks?
The pessimism on LINE shares comes from cash flow concerns. The firm had to suspend all distributions, because they weren’t making enough money amidst low crude prices. But will oil prices remain weak enough to justify the pessimism? I wouldn’t dismiss this penny stock over those concerns.
The low revenue environment is pushing plenty of firms out of business. Linn had used its capital to buy established oil fields from other firms, adding very little strain to their capital expenditure budget. As supply tightens, oil prices will edge higher, leaving short sellers in a disastrous position. (Source: Forbes, September 18, 2015.)
As for Sirius XM, the company is doing what all stable businesses should: buy back stock. The satellite radio provider purchased 739 million of its stock for $2.5 billion in 2014, and has already scooped up 388 million shares in 2015, paying roughly $1.3 billion.
The company announced that this year’s total buyback program will hit $2.0 billion, marking the fourth consecutive year of $2.0 billion buybacks. With those numbers, SIRI is forming the kind of money-making tradition I like.