With the global markets getting hammered, interest in penny stocks is heating up.
And that’s not just because more stocks have fallen into penny stock territory. It’s because growth is getting hard to find. And more and more investors are looking wherever they can for tomorrow’s big winners.
That means investors need to be even more diligent when researching stocks. While the vast, vast majority of penny stocks aren’t worth any of your time, some are.
Interest in Penny Stocks Growing
Wall Street is telling investors what they already know. The global markets are officially in bear market territory. Late last week, the MSCI All-Country World Index closed down 20% from its most recent 52-week high last May. The index follows large and mid-cap stock performance across 23 developed and 23 emerging economies.
The not-so-recent turn of events shouldn’t have caught investors or Wall Street off-guard. The U.S. economy advanced just 0.7% in the fourth quarter, after advancing an even two percent in the third quarter and 3.9% in the second quarter. January jobs data was also discouraging.
The global economy has been doing poorly for ages. Announcing a global bear market is just a formality, especially when you take a look at the number of world indices that were in bear market territory before the official announcement: China, Japan, Germany, England, France, Canada, Sweden, and Russia. It’s a who’s who of economic development.
Here at home, the S&P 500 is down 11.0% since the beginning of January, the Dow Jones Industrial Average has fallen 10.5%, and the Russell 2000 Small Cap Index is down an eye-watering 16.0%.
With the markets getting hammered more and more, investors are looking to find that diamond in the rough. For many investors, that means delving into penny-stock territory. For the sake of this article, I’m pegging that at stocks trading for $5.00 or less.
Yes, penny stocks can be thinly traded, volatile, and manipulated. And yes, you can lose your whole investment, just like investors did when they trusted their retirement portfolio to so-called stalwarts like Lehman Brothers, Nortel, and Enron.
The fact of the matter is that you need to do your due diligence. There are a lot of great profitable penny stocks with growing revenue and tremendous long-term growth potential. It would be a shame to avoid those potential profits just because you don’t like the entry level.
Top Three Penny Stocks to Watch
1. Nevsun Resources
Nevsun Resources (NYSEMKT:NSU, TSE:NSU) is a Canadian mining company that specializes in copper, gold, silver, and zinc. In fact, it operates one of the highest grade open pit base metal deposits in the world. Nevsun is able to produce approximately 150 million pounds of copper annually, which is great when the global economy is doing well.
To offset this challenge, the company is in the process of transitioning part of its operations from copper to zinc. Why? Because there is a record shortage of zinc and the gulf is expected to widen over the years to as much as two million metric tons in 2017. Over the next five years, there has been essentially zero increase in the zinc supply. (Source: “Record Zinc Shortage Seen Widening as Producers Close Mines,” The Guardian, March 5, 2015.)
This tends to be seen as a bullish argument for zinc prices.
The year 2016 will be a transitional one for Nevsun, as operations move over to zinc. The company expects its zinc expansion project to be finished in April and commence ore commissioning in the latter part of the second quarter. After its zinc expansion, the company expects to produce 40–60 million pounds of copper in concentrate and 70–100 million pounds of zinc in concentrate. (Source: “Nevsun Outlook Provides 2016 Production and Cost Guidance,” Nevsun Resources, February 11, 2016.)
Nevsun trades in penny-stock territory at approximately $3.00 per share, up 28% since coming off a double-bottom in mid-January. It also provides an annual dividend of $5.56 per share.
2. Northern Oil & Gas, Inc.
With oil prices down almost 30% since the beginning of the year and 75% since September 2014, most think it’s not the best time to be looking at oil and gas companies—let alone an oil and gas penny stock. But it’s one of the best times to do so.
The global economy will rebound and the economic engines will continue to run on oil. So now is the perfect time to look for oil and gas companies that have been beaten down—due to sector weakness and not because of internal problems.
An independent energy company, Northern Oil & Gas, Inc. (NYSEMKT:NOG) is the leading non-operator franchise in the Bakken and Three Forks plays in the Williston Basin of North Dakota and Montana.
According to the United States Geological Survey, the Bakken formation and Three Forks formation in North Dakota, South Dakota, and Montana has a mean of 7.4 billion barrels of undiscovered, technically recoverable oil. (Source: Northern Oil & Gas, last accessed February 12, 2016.)
Since 2009, the company’s compound annual production growth rate sits at 67%. Over the same period of time, Northern Oil & Gas has reported an annual compound proved reserves growth rate of 125%. Most recently, in 2014, the company’s proved reserves increased 20% to 100.7 million barrels of oil equivalent. Overall, the company has a 215% return on every $1.00 invested in finding and development costs. (Source: “Key Metrics,” Northern Oil & Gas, Inc., last accessed February 22, 2016.)
Trading near $3.00 per share, Northern Oil & Gas, Inc.’s share price is down more than 80% since hitting a high in August 2014, most notably as a result of weak oil prices. That clearly doesn’t mean investors should turn a blind eye to the company.
In early February, billionaire investor and major Northern Oil shareholder Robert B. Rowling acquitted an additional 361,126 shares at an average price of $3.05, for a total investment of $1.1 million. (Source: “Statement of Changes in Beneficial Ownership,” SEC, last accessed February 12, 2016.)
This follows two other recent purchases. On February 1, Rowling acquired 455,601 shares at an average price of $3.14 for a total transaction of $1.4 million. On January 21, he purchased 700,000 shares at an average price of $2.50 per share for a total transaction of $1.75 million.
Rowling knows a little bit about oil and gas; in 1989, he and his father sold most of their oil and gas assets to Texaco (now Chevron) for $500 million.
3. Skyline Corporation
Skyline Corporation (NYSEMKT:SKY) is an Indiana-based penny stock that designs, produces, and markets manufactured housing, modular housing, and park models in the U.S. and Canada. Its models include two to four bedrooms, kitchens, dining areas, one or two bathrooms, fireplaces, and whirlpool tubs.
The company also has an incredibly sound balance sheet with a strong cash position and no corporate debt. (Source: “Skyline History,” Skyline Corporation, last accessed February 12, 2016.)
On January 14, the company announced that revenue for the second quarter of fiscal 2016 (ended November 30, 2015), increased 18% year-over-year to $58.6 million. Net income came in at $1.7 million, or $0.20 per share, versus a net (loss) of $(3.44 million), or $(0.41) per share, in the second quarter of fiscal 2015. This marks the company’s most profitable quarter since the fourth quarter of 2007. (Source: “Skyline Reports Fiscal 2016 Second Quarter And First Half Results,” Yahoo! Finance, January 14, 2016.)
Revenue for the first half of fiscal 2016 increased eight percent to $107.4 million. Net income for the first two quarters was $872,000, or $0.10 per share, compared to a net (loss) of $(7.21 million), or $(0.86) per share in the first half of fiscal 2015.
Trading at $4.00 per share, Skyline’s share price is up 37% month-over-month and 17% since the beginning of the year.