About to Buy Penny Stocks? Take a look at these 3 companies first
It doesn’t take much to understand the appeal of penny stocks: it’s the idea of buying millions of shares for fractions of a dime – if they only go up to $ 1 / share, you are instantly a millionaire! The reality is more depressing. Most, if not all, penny stocks are doomed to fail and will take your hard-earned money with them.
However, that doesn’t mean that investors should avoid higher risk / higher reward potential companies. With that in mind, we asked three Motley Fool contributors for stocks with long avenues for growth. I found out why iQiyi (NASDAQ: IQ), General Electric (NYSE: GE), and Alliance of craft beers (NASDAQ: BREW) might be worth exploring.
High volatility with strong trading fundamentals
Jamal Carnette, CFA (iQiyi): The “Netflix of China “is a classic story of short-term stock moves diverging from trading fundamentals. Shortly after its slow IPO, stocks exploded – doubling in three months – before slumping to their current price. Uneven performance of equities, the underlying business continued to grow at a rapid pace, posting 55% revenue growth and 72% subscriber growth in the fourth quarter.
Volatility is expected to remain elevated for the foreseeable future, as concerns over Sino-U.S. Trade relations and decelerating growth in the Middle Empire continue to dominate the headlines. As you can see, however, this hasn’t been a problem in iQiyi’s growth so far, and I don’t see any reason for this to change. On the contrary, the continuation of commercial disputes benefits iQiyi because it prevents the incumbent Netflix from fully entering the market; Instead, Netflix chose to partner with iQiyi rather than compete with it.
China’s transition from an emerging economy to a developed economy is expected to provide a long growth path for the streaming media provider, as more citizens gain access to the internet and disposable income increases; this should allow the company to offer investors significant returns. If you are looking for a high volatility investment that has the ability to quickly explode higher, look no further than iQiyi.
A risky choice
John Bromels (General Electrical): First of all, I wouldn’t recommend GE stocks to most investors. But if you are the type of investor who is interested in penny stocks, I think you should consider buying shares of the struggling conglomerate first. Here’s why.
Penny stocks come naturally with a high degree of risk. Risk is one of the main reasons I’m not a fan of GE stocks: The company is in the midst of a multi-year turnaround, with sales and earnings likely to be flat (or worse) this year and maybe next year too, depending on the management company. When “flat” is the cautiously bullish scenario projected by management, anything that goes wrong could push stocks further.
However, GE has a few bright spots that typical penny stocks lack. It is listed on the New York Stock Exchange and is required to regularly file quarterly earnings reports and information with the SEC. Its management makes regular presentations to investors to give them an idea of the direction of the company. And while some of its businesses are not doing well – gas turbines in particular – the company has a few CPUs making aircraft engines and medical equipment that are poised for long-term success – much more than the average penny Stock. And there are signs that management is finally mastering the turnaround.
Part of the appeal of penny stocks is the possibility that they rise in value quickly and offer a huge paycheck. Frankly, GE doesn’t have that opportunity, although with stocks now in single digits there is a lot more potential than a few weeks ago. But if you are serious about investing for the long term and have a high tolerance for risk, betting on GE’s turnaround could pay off in a few years for investors who buy now. It’s not my favorite stock, but it’s better than a penny stock.
Ready to ride the wave
Rich Duprey (Alliance of craft breweries): Craft Brew Alliance has suffered from the downturn in the beer industry in general – overall volumes fell 1% last year. But craft beer continues to grow, gaining 4% in 2018, giving it a market share of over 13%.
As the largest craft brewers go through difficult times, Craft Brew Alliance has put in place a turnaround plan that allows it to capitalize on the best fundamentals in the industry.
The brewer’s Hawaii-based Kona Brewing brand saw its fourth-quarter runouts (distributor-to-retailer sales) jump 11%, an acceleration from the 7% increase in the first three quarters of 2018, with its flagship product Big Wave Golden Ale up 30% in the neighborhood.
Craft Brew Alliance has a Kona + strategy in place that focuses primarily on the brand and then its other offerings to a lesser extent, such as the three fast-growing breweries it recently acquired. With Anheuser-Busch InBev as co-owner, the craft brewer has access to its distribution network.
In fact, beer drinkers prefer regional microbrewery beers, and Kona still carries this stamp, which explains its phenomenal growth. But perhaps the biggest catalyst for Craft Brew Alliance shares is that Anheuser-Busch has the right to buy its partner for at least $ 24.50 a share, almost double its current price. The option expires in August and it’s possible Anheuser-Busch will exercise it, but even if that wasn’t the case, the craft brewer is still well positioned to grow.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.