Penny Stocks: 3 Top Stocks Under $5

Penny Stocks3 Top Penny Stock Picks

No other investment offers the potential for triple-digit gains quite like penny stocks.

Traditional investors usually steer clear of penny stocks because of the perceived high risks. But the recent market fluctuations on the back of the Chinese stock market crash have blurred the lines between the volatile and the more stable investments. In the midst of this market unpredictability, it is not a bad idea to consider some of the best penny stocks for 2016 that could deliver a positive surprise in the next 12 months.

Now, anyone could just run a screener and handpick a bunch of cheap stocks for you. The problem with this strategy is that the less you know about your investment, the worse off you will be. So, before you jump onto the penny stock bandwagon, make sure you’ve done your homework on every single company you’re considering.

Bear in mind, however, that penny stock investing is a risky wager and is likened to gambling for a reason. You’ll notice that the daily volumes for these stocks are much lower than traditional investments and the lower liquidity lends to higher bid-ask spreads on their prices. The reason is that large money managers and big investors do not usually take positions in penny stocks. So, naturally, their market coverage is unsatisfactory.

Simply put, finding adequate information on these companies and stocks is, per se, a feat. Also, unless there’s big news or a sudden buying interest from a big investor, these stocks don’t move much. When they do, the price swings are significantly huge—both upwards and downwards.

I’ve made an effort to shortlist some of the best penny stocks in 2015 that are on my radar and are not only profitable, but they also run legitimate businesses that are simple to understand. Although, one could not say with full conviction that the following are good investments, they certainly have an edge over unprofitable and lesser-known penny stocks.

So, here we go!

Digirad Corporation (NASDAQ:DRAD)

The most prominent reason why I picked this company is because of its fundamentals. Rarely do you come across a penny stock like this where pretty much all the fundamentals are exceptionally good.

Operating as a small equipment company in the U.S.-based healthcare sector, Digirad Corporation operates through two of business segments: 1) it provides diagnostic services to hospitals and imaging centers, including ultrasound imaging, monitoring and testing services to physicians, as well as servicing and maintenance of equipment; and 2) it sells diagnostic equipment, primarily cameras, for ultrasound imaging and nuclear cardiology.

Financially, the company has a debt-free balance sheet with rich cash reserves. DRAD stock boasts cheap multiples, yet it has gained more than 18% value in the last year alone and more than 117% in the last five years. The return on equity that DRAD stock offers is absolutely stellar at about 50%. But the cherry on the top is its dividend yield at a robust 3.94%. Digirad has consistently paid dividends over the last years and rewards shareholders through both dividends and buybacks.

Needless to say, Digirad Corporation stock is a worthy prospect.

Pier 1 Imports Inc (NYSE:PIR)

Second up is a company that needs little introduction. Pier 1 Imports is a widely recognized brand, if not a household name, that sells furniture and home décor specialty items. Unlike its more famous counterpart, Ikea, which offers cheaper urban living solutions, Pier 1 sells both contemporary and traditional home furnishings with a bigger focus on quality. It is a one-stop, high-end alternative to the likes of Ikea.

The company has both a brick-and-mortar and online selling business model and has been in the industry for well over four decades now.

PIR stock has cratered over the last five years on the back of a consistent drop in its bottom line, even though its revenue has been consistently increasing. This has largely been due to increasing operating costs incurred by the company in order to keep pace with competition.

Nonetheless, the stock offers a stellar dividend yield of 6.5% at current levels against a dividend payout that has steadily increased over the last four years. Return on equity on PIR stock is a solid 18%, with low manageable debt and high short-term liquidity.

With Pier 1 Imports Inc stock trading close to its 52-week lows, now may be a good time to put it on your investment radar.

Stein Mart, Inc. (NASDAQ:SMRT)

What makes my next pick very appealing is its history of special dividends. SMRT stock has paid out, at least, two very significant special dividends over the last four years, in addition to its standard quarterly payout.

Stein Mart, Inc. is a specialty retailer that sells apparel, shoes, accessories, and home fashion products in the U.S. What’s particularly interesting about this company is its peculiar target market—that is, women in their 30s–40s and older. It may not be a hip brand for teens or a popular stop for 20-somethings, but Stein Mart certainly is a familiar name in the older circles. The company now also offers an extensive product line for men.

Like I mentioned, SMRT stock has a longstanding history of dividend payout, in addition to the aforementioned special dividends, and offers a robust yield of 4.7% at current lows. Return on equity stands over 17% and both its bottom and top-line numbers have been growing over the years.

Stein Mart, Inc. stock is definitely worth your time researching.