When it comes to investing in penny stocks, many simply look at the stock price and determine that because it doesn’t have to go up much to double, it must be a solid bet. Nothing could be further from the truth.
On one hand, it doesn’t look like it would take much to see a stock trading at $0.25 double in price. On the other, when it comes to investing in penny stocks, there is a risk/reward trade-off: The riskier the stock, the greater the reward. However, the riskier a penny stock, the greater the chance is that you could lose your entire investment.
But at the same time, investing in penny stocks doesn’t need to be any riskier than investing in mid- or large-cap stocks. Remember that there is no investing safe haven. You need to do your research. A large-cap company can cut corners, underperform, and make bad business decisions, just like a penny stock can. For example, think of all those investors who put their savings into so-called safer stocks likeLehman Brothers, Nortel, and Enron.
The point is that with penny stocks, investors need to do their due diligence and look for the same things they would when looking at investing in large-cap stocks. Look at the fundamentals, like the company’s business model, products and services, cash, debt, earnings, and revenues.
It’s also important to take a technical look at the broader stock market to find future price movements. Between early March 2009 (when the markets bottomed) and the beginning of 2014, the S&P 500 has climbed approximately 180%, while the Dow Jones entered the year up almost 150%.
With the bull market now in its fifth year, many economists believe the stock market is overvalued and ripe for a correction. With the U.S. economy picking up steam, there are others who believe the stock market has plenty of room to run. Some even think the bull market could continue (with some bumps along with way) for another 10 or more years.
Regardless of where the market is headed (because really, it’s impossible to know the market’s moves), it’s best to find and invest in fundamentally solid penny stocks with great long-term growth potential.
Whereas a penny stock once entailed any stock that traded for less than $1.00 per share, today, thanks to inflation, a penny stock is defined as any equity trading for less than $10.00.
The following 10 penny stocks are examples of the types of companies you could consider buying in 2014
Rite Aid Corporation (NYSE/RAD)
As the largest drugstore chain on the East Coast and the third-largest in the United States, Rite Aid Corporation has approximately 4,600 stores in 31 states and the District of Columbia. The penny stock company sells staples, such as prescription drugs, health and beauty aids, convenience foods, greeting cards, and 3,000 Rite Aid-brand private-label products. While consumer confidence levels are lackluster and consumer spending is weak, Rite Aid’s share price has weathered the storm and is well positioned to capitalize on a sustained up-tick in the economy.
Universal American Corp. (NYSE/UAM)
The artificially low interest rate environment has been great for Wall Street. Businesses can borrow money for cheap and use it to enhance business operations. But few seem to thrive in a high interest rate environment. Life insurance companies have done well in spite of low interest rates, and they should benefit further as interest rates rise. Universal American Corp. is a specialty health and life insurance holding company that provides health and senior life insurance and managed care products and services to the growing Medicare and Medicaid population in the United States. With 10,000 baby boomers retiring every day for the next 15-plus years, Universal American is a penny stock with a strong standing in a lucrative market.
New Gold Inc. (NYSE/NGD)
It’s important to diversify a retirement portfolio and that includes making room for precious metals. Unfortunately, after 2013, a year that saw gold slide almost 30%, many investors have turned their back on the shiny metal. But not the central banks… In 2013, while gold prices were tumbling, central banks were snapping up the yellow metal. In fact, 2013 was the fourth year in a row that central banks were net importers of gold. Investors like to hold gold as a hedge against uncertainty, and the central banks clearly sense political and economic uncertainty. Some people like to hold physical gold; others prefer to buy stocks in gold mining companies. New Gold Inc. is an intermediate gold producer with properties in the United States, Mexico, Australia, Canada, and Chile. The company’s various properties contain 18.53 million ounces of total proven and probable gold reserves and 90.08 million ounces of silver.
Endeavour Silver Corp. (NYSE/EXK)
Endeavour Silver Corp. is a mid-cap mining and exploration company with gold and silver mines in Mexico’s historic silver district and Chile. Endeavour Silver has three producing silver mines in Mexico, with proven and probable reserves of 11.6 million ounces of silver and 139,400 ounces of gold (total equivalent of 19.97 million ounces of silver). Furthermore, the company has a portfolio of exploration properties. Since its start-up in 2004, Endeavour Silver has posted nine consecutive years of growth in silver production, reserves, and resources. In 2013, the company’s silver production increased to 6.8 million ounces of silver and 75,578 ounces of gold. While 2014 may not be the year gold bullion regains all of its shine, it might be remembered as the year when astute penny stock investors got in ahead of the rush.
Builders FirstSource, Inc. (NASDAQ/BLDR)
With homebuilders’ confidence up and U.S. housing data improving, many home improvement stores have been reporting solid earnings growth. And with the U.S. economy on the mend, homebuilding stocks are expected to grow stronger. Builders FirstSource, Inc. is a manufacturer and supplier of structural and related building products. The company makes and sells hardware and doors, windows, lumber, and other structural building products to construction professionals. Customers have includedD.R. Horton and Hovnanian Enterprises. The company reported strong second-quarter results and recently completed a number of strategic acquisitions, increasing its presence in Texas and Florida.
WisdomTree Investments, Inc. (NASDAQ/WETF)
WisdomTree Investments, Inc. is a financially robust asset management company with growing revenues and earnings, a strong cash position, and zero debt. WisdomTree is the eighth-largest exchange-traded product (ETP) provider in the world. The penny stock pioneered the idea of fundamentally weighted exchange-traded funds (ETFs). It is also the only publicly traded asset manager exclusively focused on the ETP industry. Serving both individual and institutional investors, WisdomTree Investments has approximately $33.0 billion in ETF assets under management. Over the last year, the fast-growing company has increased its research and development (R&D) spending by more than 80%.
Algonquin Power & Utilities Corp. (TSX/AQN)
With certain aspects about the improving U.S. economy in doubt, including jobs and wages, it’s important to add penny stocks that we rely on every day…such as utilities. Utility stocks tend to be more stable, as consumers need water, gas, and electricity regardless of where the economy is going. Algonquin Power & Utilities Corp. is a growing renewable energy and regulated utility company with a diversified portfolio of assets across North America. The company invests heavily in hydroelectric, wind, and solar power facilities, and sustainable utility distribution businesses (water, electricity, and natural gas) through its two operating subsidiaries: Algonquin Power Company and Liberty Utilities. A penny stock like Algonquin Power & Utilities is a great option for investors looking to strengthen their investment portfolio with a company that provides a solid dividend yield and consistent capital growth.
AK Steel Holding Corporation (NYSE/AKS)
When it comes to growth, the summer of 2014 will not be remembered for very much on the major stock indices. The same cannot be said for AK Steel Holding Corporation. Since the beginning of June, the company’s share price has climbed more than 65%. AK Steel is a global leader in the production of flat-rolled carbon, stainless, and electrical steel products primarily for use in the automotive, infrastructure and manufacturing, construction, and electrical power generation and distribution markets. The company reported solid second-quarter results and experienced meaningful improvements in virtually every aspect of its business. The stock should benefit from an uptick in economic activity and manufacturing.
Huntington Bancshares Incorporated (NASDAQ/HBAN)
Thanks to the ultra-low interest rate environment, banks have been one of the biggest winners on Wall Street since the recession ended in 2009. At the same time, low interest rates mean there is a limit to what banks can charge for the money they lend. With the U.S. on stronger financial footing, America’s banks are looking forward to rising interest rates. When interest rates rise, banks and other lending institutions can raise the amount they charge for loans faster than what they pay on the deposits. While all of the big banks are out of penny stock territory, there are some great regional banks out there.Huntington Bancshares Incorporated is a $64.0-billion regional bank holding company headquartered in Columbus, Ohio whose principal subsidiary is The Huntington National Bank. Through its 700 branches, 1,500 ATMs, and client web site, the company offers retail, business, and commercial banking; commercial real estate; and brokerage and wealth management services.
Atlantic Power Corporation (NYSE/AT)
In spite of its name, Atlantic Power Corporation has operations on both sides of the U.S. and in Canada. The power company has close to 30 hydro, coal, wind, and natural gas power generation projects in 11 states and two provinces with a net generating capacity of 2,945 megawatts (MW). Its plants are located primarily in the northeast, southwest, and northwest. The company’s share price experienced a significant pullback in 2013 and bottomed in February of 2014 near $2.00. Since then, the penny stock’s share price has almost doubled. In addition to providing investors with solid capital appreciation, Atlantic Power also provides an eye-watering 9.6% dividend.
Not all penny stocks are worth a second look. In fact, the vast majority aren’t. But having said that, where you find companies to invest in isn’t as important as finding undervalued stocks ripe for huge gains. When put under the microscope, penny stocks offer investors excellent opportunities to significantly grow their portfolios.