These 4 Penny Stocks May Very Well Be Worth The Risk

| July 25, 2018
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These 4 penny stocks have a real shot to be big winners

Most of the time, it is best just to forget about penny stocks.

After all, there is a reason penny stocks have plunged to trade below $10. And that reason isn’t a good one. Stocks don’t IPO below $10. So, if you’re looking at penny stocks below $10, always remember that the stock got there because investors sold it off to that point.

But, every once in a while, penny stocks are worth buying because the potential reward outweighs the potential risk.

For example, take my piece in late March about about 3 stocks under $10 that investors should consider buying. Those three stocks were clothing retailer Francesca’s (NASDAQ:FRAN), teen retailer Express (NYSE:EXPR), and music streaming platform Pandora (NYSE:P).

Since that piece was published, FRAN stock has risen 47%, EXPR stock has risen 35%, and P stock has risen 65%. Keep in mind, all those big gains have happened in just three months. Annualized, then, you are talking about 100%-plus gains.

Big picture: sometimes, it is worth buying penny stocks because they can offer big returns in a short amount of time.

With that in mind, here’s my fresh batch of penny stocks that I am buying here and now.

Penny Stocks That Are Worth the Risk: Pier 1 Imports

For all intents and purposes, Pier 1 Imports (NYSE:PIR) has been the ugly duckling of the furniture retail world. While peers like Restoration Hardware (NYSE:RH) have more than doubled over the past year, PIR stock has dropped by more than 50%.

Over the past five years, it is uglier. PIR stock has lost more than 90% of its value during that stretch.

But, I sense a turnaround is near.

At its core, Pier 1 has been killed by rising ecommerce threats creating huge pricing and traffic headwinds. Pier 1, which stands somewhat square in the middle of price and quality, doesn’t really have anything special about the business to protect against these headwinds. Consequently, sales and margins have dropped in a big way.

But, the company recently unveiled a three-year strategic plan to turn the business around. The plan includes a re-launch of the Pier 1 brand this fall and bigger investment into omni-channel commerce capabilities and marketing.

It remains a big question mark as to whether or not this turnaround will work. But if it does, PIR stock could explode higher. The stock price is just over $2. Just a few years ago, PIR was netting a profit of $1 per share.

Thus, even if PIR only regains a portion of its profits a few years back, then PIR stock could head significantly higher from here. The re-launch of the Pier 1 brand this fall could be the big catalyst for this stock, so PIR stock could have a big rally in the back-half of 2018.

Penny Stocks That Are Worth The Risk: Arotech

When it comes to micro-cap defense contractor Arotech (NASDAQ:ARTX), it isn’t about what has happened, but what could happen.

What has happened isn’t pretty. Despite being in the same space as guys like Lockheed Martin (NYSE:LMT) and Honeywell (NYSE:HON), ARTX stock hasn’t gained any ground over the past several years.

That is because the financials haven’t gained any ground. Five years ago, revenues were $88 million and operating profits were $3.5 billion. Last year, revenues were $98 million and operating profits were $2.9 million. When profits don’t go up, the stock tends not to go up.

But, profits are stabilizing. Adjusted earnings are expected to be between $0.15 and $0.18 per share this year, versus $0.17 per share last year. When profits go from declining to stabilizing, they usually go to growth next.

Indeed, the fundamental backdrop also supports a growth era ahead. The Trump administration is defense and military-first, and as such, everyone in the defense space is getting a big boost.

This is a rising tide that will lift all boats, ARTX included. Thus, it would make sense for ARTX profits to start rising over the next several years as the company wins more defense contracts.

In that scenario, ARTX could roar higher. Imagine earnings climb mildly to $0.50 in 5 years. A market-average 16 forward multiple on that implies a four-year forward price target of $8, versus a sub-$4 price tag today.

Penny Stocks That Are Worth The Risk: Zynga

Mobile gaming company Zynga (NASDAQ:ZNGA) is a story of pivots. And the company’s most recent pivot into mobile is arguably its most promising pivot yet.

Zynga used to be a mega-popular browser game company with tons of users. But then the company overreached by branching into games that had heavy overlap with the traditional video game market, like sports titles. They couldn’t compete in that market. Eventually, the over-extension sparked user churn, and ZNGA stock spiraled downward.

Zynga proceeded to pivot, transitioning its business model from web-focused to mobile-first while narrowing its gaming title focus. This pivot was supposed to streamline operations, re-invigorate top-line growth, cut costs and improve profitability.

Indeed, it has. Mobile revenue growth was 13% last quarter. Mobile bookings growth was 10%. The company also reported its biggest mobile audience in over four years, with 23 million mobile daily active users (+24%) and 82 million mobile monthly active users (+30%).

Most important, the company swung from a net loss in the year ago quarter to a net profit this quarter thanks to an improving margin profile.

This pivot appears to be in its early stages. Mobile is a secular growth narrative, and ZNGA has developed a gaming portfolio that is focused and tailored to that growth narrative. This combination should power healthy results going forward, and those healthy results could cause ZNGA stock to bounce back in a big way.

Penny Stocks That Are Worth The Risk: Groupon

Savings-king Groupon (NASDAQ:GRPN) feels like one of those companies that was loved yesterday but will be forgotten tomorrow.

The numbers, though, don’t really support that thesis.

Yes, the savings and deals market isn’t what it used to be, and consumers can go to any other number of places to find great savings. That is why GRPN’s revenues have been in retreat over the past several quarters.

But the customer base is still growing (up more than 2% year-over-year last quarter), and that shows that global popularity of the GRPN platform is still growing, albeit at a snail’s pace.
Meanwhile, margins are improving thanks to management’s focus on higher-margin businesses. Operating expenses are also being removed from the system, so the company’s overall profitability profile is dramatically improving (gross profit per active customer on a trailing twelve month basis was up 3% year-over-year last quarter).

Therefore, all GRPN needs to get its stock back on track is turn revenue growth around. That would be hard if the customer base was in decline, too. But it’s not. Consequently, positive revenue growth in a multi-year window is a real possibility.

Plus, the company is putting itself up for sale, and some analysts think this company can fetch a $12 takeover price. Put it all together, and it looks like GRPN stock could have a big time rally in the back half of 2018.

As of this writing, Luke Lango was long FRAN, EXPR, PIR, and GRPN.

 

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