How to Find the best penny stocks to grow your portfolio
Want to know how to make your investment dollars go farther? That means going off the beaten path, the mega-size company stocks that most investors buy, and finding the smaller companies with the potential to jump higher.
I’ve found five small cap stocks under $5 that could double in the next year. Of more than 4,300 small company stocks, these are my five favorite to buy for 2020. We’re talking best stocks under $5 per share today on Let’s Talk Money!
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Do Penny Stocks Beat the Market?
Nation, since our best stocks under $10 video in October, you’ve been asking for another on cheap stocks. Four of the five picks in that one are beating the market and the group is averaging a 7.5% return in just the last month.
So let’s go lower! We’ve already seen how these low price stocks can boost your portfolio for outsize gains, what about stocks under $5 to really give it growth?
Now to be clear, we’re not just talking about any stock under a $5 share price. Shares of Avon Products trade for $4.40 each but the company has a market cap of nearly $2 billion.
No, I want to find the best small cap companies, cheap stocks of small companies primed to become the next Amazon or Apple.
For that, we’ll be looking at companies with a market cap of under $1 billion along with some critical factors.
The reason here is that small caps just tend to beat the market. We see in this chart of the Russell 2000 index of small cap stocks, the green line, and the S&P 500 index of the largest U.S. companies in red, smaller stocks have a habit of breaking out for stronger returns.
Now small cap stocks have broken down since early this year and are actually lagging by almost 9%, mostly on the recession fears we had earlier in the year. That means valuations have come down, a lot of investors have bailed and you can pick up that 9% gap plus more with the right small stocks.
Why Small Cap Stock Returns are Higher
These small companies also have better financial flexibility to shift with trends and are not well covered by Wall Street analysts. You’ve got a much better chance at finding a great, undiscovered investment.
I don’t want to oversell this though. I want to walk you through real quick on what to look for to find stocks under $5 and these small cap opportunities, then I want to reveal those five small company stocks you’ll want to put on your radar for 2020.
In fact, I’m putting these five stocks in my Webull paper portfolio with $10,000 each. I love the option on Webull to create these test portfolios and different strategies.
Webull is a newer online platform but perfect for stock traders. It’s completely free to invest, you’ll never pay a commission to buy or sell, and the app is set up for stock trading in a way that Robinhood can’t handle.
With Webull, you not only get that trade simulator with a paper portfolio but also access to extended hours quotes before and after the official market open.
Screening through more than 4,300 small stocks under $5 a share, I looked for companies with positive sales trends and strengthening financial health. So I screened for measures like a falling debt-to-equity ratio, sales in the last year that were higher than previous and an improving current ratio.
Watching for that financial health is critical when you’re picking these small cap stocks. These companies don’t have the scale or financial power of the larger mega-cap stocks. A weakening economy or financial trend can wipe them out in a heartbeat so you need to find the ones with the best likelihood to survive until they can grow.
Now you’re never going to find a small cap stock with a perfect balance sheet. These companies live on debt so they’re usually pretty highly leveraged already but look for ones with a lower debt-to-equity ratio and improving sales numbers.
Using these criteria, I found five stocks under $5 that could be worth a look. To get that important diversification, I’ve tried to pick stocks from different sectors so we’ve got picks from energy, retail, healthcare and financials.
Best Penny Stocks to Buy in 2020
Our first here is Range Resources, ticker RRC, with a 1.9% dividend yield which is rare for small cap companies.
RRC is an oil & gas exploration company out of Texas and looking for small cap stocks, you’re going to find a lot like this one. The energy sector has just been slammed over the past five years on weak crude prices and a wave of supply out of U.S. shale fields.
Range Resources is one of the lower-cost producers where it produces and has a huge backlog of drilling locations it has in inventory. This makes it a best of breed in the space but even that doesn’t make it immune from bad economics of supply and demand.
Now I realize that’s not a very good pitch for a stock you might consider buying but I want you to know the risks. When oil and gas prices move higher, this one will be the first to benefit and I think the share price could be worth double what it is now.
Shares trade for 7.9-times earnings but profits are expected to pretty much bottom out over the next year before they start to recover. Analysts have a low target of $4 per share and a high around $5 over the next year but this is one that has most of it’s life waiting over the next three to five years.
These small cap oil stocks are definitely ones you want to be strategic with your investing dollars. Consider saving half of your investment for later, maybe six or 12 months after your initial investment just in case prices continue to fall.
This sector is the only value left in the market though and I don’t think investors can ignore it. I added my five favorite oil stocks to our sector investing series just recently.
Next here is deals site Groupon, ticker GRPN, and although this one is a little bigger at $1.6 billion, I really like the potential here.
Groupon competes in two markets. First in the daily deals segment where local businesses advertise and pay Groupon thirty- to thirty-five percent of coupon prices. Also in the direct shopping segment where customers can buy directly on the site and where gross margins are around the 12% to 15% range.
The daily deals space puts it in competition with social media platforms like FB where businesses can advertise on their own. Direct shopping puts it in competition with Amazon.
Both are tough markets but fortunately for Groupon, also vast and growing markets. Online retail sales are growing at double-digit rates every year and the trend to buying experiences fits well with Groupon’s coupon deals.
What I like about Groupon is its rock-solid balance sheet with just $200 million in long-term debt and over $840 million in cash. That’s a third of the company’s value in cash.
Shares trade for 19.6-times earnings which are expected to jump 73% in the next four quarters. I’m not sure it can make that kind of growth but even profit growth in the twenty- or thirty-percent range could be enough to bring investors back big time.
I think Groupon has some real strength here in its platform and a lot of fundamental value in the balance sheet. Even if that earnings growth disappoints, the company could be a buyout target some day to fold into a larger retailer.
Analysts have a low target of $2.80 per share and a high of $5 each over the next year and I think the next four quarters could be pivotal for the company.
$250 million Seres Therepeutics, ticker MCRB, trades for around $3.60 per share and could be an outperformer in 2020.
The biotech company is focused on the ulcerative colitis market with over 700,000 patients in the U.S. alone as well as other immuno-oncology treatments. Seres is expecting four pipeline milestones in 2020, any of which could bounce the shares on headlines.
The earnings picture is ugly but that’s how it is with biotech companies. Biotechs like Seres burn through cash until they hit a blockbuster and then sell it to one of their program partners. The company has no long-term debt though and the $102 million in balance sheet cash is seen as sufficient to fund operations through 2021.
There are only three analysts here with price targets so don’t read too much into it but a low target at $8 per share and a high around $11 each is definitely something that puts this stock on my watch list.
The smallest company on our list is $169 million Elevate Credit, ticker ELVT, a sub-prime online lender for borrowers in the U.S. and U.K. markets.
Elevate is a small fintech company but turned profitable in 2017 and has booked triple-digit earnings growth in each of the last two years. Costs to find customers has plunged over the past year to $184 which is 25% lower than the $245 cost it booked per customer in 2018.
Shares trade for just 6.2-times earnings which are expected higher by 24% over the next four quarters and to continue climbing from there.
I feel like investors still aren’t giving much credit to fintech loan companies and you can see why after the experience with Lending Club’s falling stock price. While Elevate may not have the size of other lending platforms, it’s profitable and the valuation here is too low to ignore.
Just one analyst watching Elevate here so you can pretty much ignore this chart but I had to include it for consistency. This is a rare opportunity in small cap stocks with a profitable company and solid growth. I can easily see this one going to $5 a share and beyond in the next 12 months.
Nabors Industries, ticker NBR, is the world’s largest land rig drilling contractor and shares here are actually below $2 each.
Last oil & gas play here, I promise, but I couldn’t pass up Nabors in the list. I like Nabors because not only is it a leader in U.S. drilling but it has a strong international presence where rig counts should start to improve soon.
The earnings picture on this one is not pretty but the company has the cash flow to cover its debt payments so I don’t think there is any existential danger here. The analysts on Nabors think the share price has bottomed around that $2 lower bound and could go as high as $4 per share over the next year. Just like with Range Resources, this is one you have to watch for a while.
Remember, these $5 stocks and the entire small cap stock selection is going to be riskier than the stocks you'll find in the S&P 500. They hold the potential for huge returns but also to lose a lot of money in a heartbeat. Make sure you're spreading out your risk through other investments in the stock market.