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Penny Stocks

These are interesting times, aren't they? Inflation is at multi-decade highs, the Federal Reserve is trying to raise interest rates, the novel coronavirus persists, supply chains are still out of whack and Russia just invaded Ukraine. That probably has investors asking, why penny stocks?

I too allocate a healthy dose of skepticism to this group and that's even during a bull market! When a bear market comes around, it's time to be even more vigilant. Seriously, many investors may be better off in low-volatility funds or dividend stocks with strong cash flows.

Penny stocks trade in the sub-$5 and sub-$10 range for a reason. Will they always? The hope is no. Bulls hope that these stocks are being unfairly discounted and that value will eventually shine through when better times come around.

That said, I must reiterate that investors should approach these stocks like call options without an expiration — the only expiry comes if they go bankrupt — so trade them as if they are call options. That means no going all in!

Best Penny Stocks

Despite the risky nature of penny stocks, some can pay off with huge rewards. That's as Wall Street sells the entire group lower and loses focus on the potential value of the business. With that in mind, these names below fit into certain secular trends that may yield value down the road, provided they can survive the current downtrend.

• CuriosityStream (NASDAQ:CURI)
• Jumia Technologies (NYSE:JMIA)
• Ondas (NASDAQ:ONDS)
• AcuityAds (NASDAQ:ATY)
• XL Fleet (NYSE:XL)
• Arrival (NASDAQ:ARVL)
• Canopy Growth (NASDAQ:CGC)

• CuriosityStream (CURI)

CuriosityStream is positioned in the secular growth theme of streaming video. The company boasts a market cap of just $180 million and allows streaming on any device. It offers shows, series and documentaries in a growing library of digital content. Given the direction of streaming video, this company could be an acquisition target. In the meantime, it's forecast to grow revenue 79% in 2021, 70% in 2022 and more than 46% in 2023 and 2024.

• Jumia Technologies (JMIA)

Bulls refer to Jumia as the "Amazon (NASDAQ:AMZN) of Africa." Despite it being a volatile business environment, Africa has a population of nearly 1.4 billion people. Thus, the company that eventually figures out African e-commerce will reap massive rewards. That said, investors are hoping that it will be Jumia. There are clear concerns about its business  — particularly as it operates at a loss. However, there is a lot of promise. Investors are likely hoping for more than the 23% and 25% revenue forecasts for 2022 and 2023, respectively, but should it deliver, it will be one step in a promising future.

• Ondas (ONDS)

Ondas is starting to generate revenue, but has clear risks given that it's not really driving much revenue at the moment. However, the stock is loaded with potential as its technology "supports IEEE 802.16s, the new worldwide standard for private licensed wide area industrial networks." So, if Ondas' revenue can come up to speed, ONDS stock could have big potential. In fact, just with drones alone, Ondas could be undervalued.

• AcuityAds (ATY)

Situated in the secular growth theme of advertising and specifically, in programmatic advertising, AcuityAds is one of the few companies on this list that is profitable and growing revenue. However, with a $165 million market cap, it doesn't get the respect it hoped from Wall Street. Could this be an acquisition target down the road? Possibly. Nonetheless, analysts expect 18% to 20% revenue growth in 2022 and 2023 for AcuityAds.

• XL Fleet (XL)

XL Fleet is a play on the electric vehicle (EV) theme, which continues to gain excitement among investors. The company "offers a comprehensive suite of fleet electrification solutions." While XL Fleet isn't profitable, it's forecast to generate monstrous revenue growth in 2024, with estimates calling for nearly 525% growth.

• Arrival (ARVL)

Largely speaking, EV makers have been in the toilet. The major EV manufacturers have been holding up, but the newcomers and the recent special purpose acquisition company (SPAC) entries have really struggled. However, Arrival could be different. While its stock has been crushed, it has orders from United Parcel Service (NYSE:UPS) and counts Hyundai (OTCMKTS:HYMTF) and Kia as major investors. The company isn't forecast to do much in 2022, which won't help its stock. But in 2023, analysts expect more than $1 billion in revenue.

• Canopy Growth (CGC)

The cannabis trade comes and goes, but one of the few consistent components is Canopy Growth. Whether the stock is under pressure or soaring higher, cannabis investors tend to like this one. While it has its troubles — otherwise it wouldn't be on the list — it has a huge investor in its business with Constellation Brands (NYSE:STZ) and has some of the best financials in the space. Furthermore, estimates call for 13% to 17% revenue growth in 2023, 2024 and 2025, respectively.

What Are Good Penny Stocks?

So what are some good penny stocks that didn't make this list? Good penny stocks include companies like BlackBerry (NYSE:BB), Applied Optoelectronics (NASDAQ:AAOI) and Yamana Gold (NYSE:AUY) because they have all been around for a while and have proven that they have some staying power.

Yamana Gold (AUY)

Specifically, Yamana gold is one of the few penny stocks that are actually trending higher. It's riding higher as the price of gold and precious metals continues to climb, while the stock actually pays a dividend yield of 2.2%.

BlackBerry (BB)

Moreover, BlackBerry is a decent company and has proven that it can have spurts of upside momentum. However, it has also proven that it's had little success thus far in building long-term and sustainable momentum. That said, it's one of the "safer" penny stocks out there.

Applied Optoelectronics (AAOI)

Lastly, Applied Optoelectronics was trading north of $100 just a few years and has had some nice upside rallies amid its fade to its penny-stock status. However, the long-term trend has been to the downside. The company is forecast to generate roughly 10% revenue growth this year and next year and reduce its losses in 2023. Thus, if it proves itself, the stock could certainly run.

Are Penny Stocks Good Investments?

No, penny stocks are not good investments. However, they are good speculations when chosen carefully. Again, I would say that with the proper risk-management approach, penny stocks can have attractive payouts. The key is being in a position where these stocks can fall in value tremendously.

As investors, we must always recognize that our stocks can fall further than we expect. However, when we're investing in Apple (NASDAQ:AAPL) or Coca-Cola (NYSE:KO), we are doing so with knowledge that the company will not go out of business.

With penny stocks, though, that's not necessarily a comfortable assumption we can make. These stocks can be incredibly volatile and we can wake up to a tremendous overnight loss or gain. Therefore, I would again say that investors should invest in penny stocks as if they were call options. Do so as if you could wake up tomorrow and the stock would be at zero and allocate accordingly.

Are Penny Stocks Value Stocks?

No, penny stocks are not value stocks by definition. Because many of them do not generate a profit, they can be difficult for the average investor to value. One must dig deep and determine whether the current risks are being overly priced in vs. the reward. Oftentimes, this task can be rather difficult.

However, successful penny stocks are value stocks once things start to go their way. As business picks up or the company secures an infusion of cash, it can help accelerate the business in a meaningful way, and then suddenly, the stock is undervalued.

Are Penny Stocks Growth Stocks?

No, penny stocks are not growth stocks either. This group of equities is unique in how it's classified. For a stock to be considered a growth stock, I would need to see consistent earnings and revenue growth trending higher year after year. I would need to see that in analysts' estimates, too.

The problem with penny stocks isn't necessarily growth, but rather, consistency.

Simply put, we cannot count on this group to consistently grow its revenue and EBITDA. Instead, we often see erratic swings in the top and bottom lines. So, because of that, it's impossible to consider these holdings as growth stocks.

When Are the Best Times to Buy Penny Stocks?

The best time to buy penny stocks is preferably when the bull market is going hard and strong. When we are in a "risk-on" environment, investors have a bigger appetite for these smaller companies. They will buy them with a portion of their gains in other stocks and look to hit a home run.

Overall, a bull market acts as a rising tide that lifts all boats — even when those boats are puny little penny stocks.

The flip side to that is, it's hard to find any value in penny stocks during a bull market. Once these stocks have been bid up, we're often left with a risky and highly-valued asset. Just look at how many of these stocks have fallen, with many down by 75% or more from the highs.

Penny Stock ETFs

There are not many penny stock ETFs out there. Like we stated earlier, this is a unique group of high-risk, high-reward stocks. These are not like energy stocks or semiconductor stocks.

That being said, investors can look at microcap ETFs as possible alternatives, such as the iShares Micro-Cap ETF (NYSEARCA:IWC), First Trust Dow Jones Select MicroCap Index ETF (NYSEARCA:FDM) and Invesco DWA SmallCap Momentum ETF (NASDAQ:DWAS).

Which Penny Stocks Pay Dividends?

Penny stocks do not typically pay dividends. That's for two main reasons, as the companies usually lack the financial capacity to pay a dividend and as they are focused on reinvesting those extra funds in growing the business (or both).

The one exception from this list is Yamana Gold, which actually does pay a dividend. However, that is the exception rather than the norm.

On Penny Stocks and Low-Volume Stocks: With only the rarest exceptions, InvestorPlace does not publish commentary about companies that have a market cap of less than $100 million or trade less than 100,000 shares each day. That's because these "penny stocks" are frequently the playground for scam artists and market manipulators. If we ever do publish commentary on a low-volume stock that may be affected by our commentary, we demand that InvestorPlace.com's writers disclose this fact and warn readers of the risks.

Read More: Penny Stocks — How to Profit Without Getting Scammed

On the date of publication, Bret Kenwell held a long position in JMIA and CURI. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.

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