Penny stocks may seem like the best investment to make if you’re looking for huge potential upside. The idea of stumbling upon an under-the-radar, cheap stock you can buy for pocket change and may grow into the next Fortune 500 company is certainly exciting.
In reality, stocks that trade for less than $5 are typically among the highest-risk investments in the market. On the flip side, there are a handful of hidden gems among the thousands of subpar penny stocks.
If you’re willing to stomach the risk and ride out the volatility, here are the best penny stocks with significant upside potential and bullish ratings from Wall Street analysts. We screened for stocks with share prices under $5 that had a strong earning potential, market capitalizations greater than $250 million and a “buy” consensus among analysts.
*Market data as of Nov. 30.
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Best penny stocks
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VAALCO Energy (EGY)
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Ardelyx (ARDX)
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Savara (SVRA)
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Iovance Biotherapeutics (IOVA)
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iQIYI Inc. (IQ)
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Compare the best penny stocks
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Methodology
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Final verdict
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Are penny stocks a good investment?
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Risks to consider
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How to buy penny stocks
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Tips for trading penny stocks
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Frequently asked questions (FAQs)
Why trust our investing experts
Experienced stock analysts select our best stock selections based on screening for several must-have metrics. These metrics often include but are not limited to forward price-to-earnings, risk, earning stability and Wall Street “buy” consensus. Among all of our 70-plus stock selections, the average return beats the S&P 500. But investors should note that before purchasing any stocks, it’s important to do plenty of research and ensure their selections align with their financial goals and risk tolerance. You can read more about our methodology below.
- 300+ companies screened.
- 3 levels of fact checking.
- 3-step editorial review.
- Altimeter stock grade of B or higher.
Best penny stocks
VAALCO Energy (EGY)
Sector
Energy
Market cap
$490 million
YTD performance
8%
What you should know
VAALCO Energy is a Texas-based independent oil and gas exploration and production company focused on properties in West and North Africa and Western Canada.
Russia’s 2022 invasion of Ukraine further disrupted tight global energy markets. Global energy supply shortages and commodity price inflation have led to record profits for the energy sector.
VAALCO has reported solid production growth in 2023, reporting a year-over-year 20% increase in August despite lower commodity pricing.
EGY also sports a current yield of around 5.36%. Dividends are a rarity among penny stocks, and the dividend hike indicates that VAALCO’s management expects positive momentum in 2023.
Pros and cons
Pros
- Strong year-over-year increases in revenue.
- Dividend yield of around 5.36%.
- Supportive energy market environment.
Cons
- Exposed to downturns in oil and natural gas prices.
- Regulatory risks associated with global climate change initiatives.
- Negative investor sentiment toward legacy energy stocks.
More details
P/E: 14.27.
Ardelyx (ARDX)
What you should know
Ardelyx is a biopharmaceutical company. The company launched Ibsrela (tenapanor) in the U.S. in March 2022 to treat irritable bowel syndrome with constipation, Net sales for Isbrela, as reported in the third quarter, brought in over $22 million in revenue, with 22% quarter-over-quarter growth.
In May 2023, the Food and Drug Administration accepted Ardelyx’s application resubmission for Xphozah (tenapanor) to control serum phosphorus (a mineral in our blood) in patients with chronic kidney disease on dialysis. In October 2023, the FDA approved the kidney disease med Xphozah.
The company also had its drug application for tenapanor accepted by China’s Center for Drug Evaluation in July, with a possible approval for the treatment drug expected in 2024.
Pros and cons
Pros
- In September 2023, Ardelyx’s partner Kyowa Kirin received regulatory approval in Japan for tenapanor patients with chronic kidney disease on dialysis.
- The stock is up by triple digits over the past year.
- Additional medical uses for tenapanor or positive data could be bullish catalysts.
Cons
- Negative return on asset as of June 2023.
- The company generated a net loss of $67.2 million in 2022.
- Headline risks are associated with poor clinical trial data on pipeline drug candidates.
More details
P/E: N/A.
Savara (SVRA)
Sector
Health care
Market cap
$527.83 million
YTD performance
148.4%
What you should know
Savara is a clinical-stage biopharmaceutical company developing treatments for rare respiratory diseases. Its lead product candidate is an immunostimulator called molgramostim, which is in phase 3 clinical trials to treat autoimmune pulmonary alveolar proteinosis (aPAP).
Molgramostim has received an orphan drug designation by the FDA and the European Medicines Agency for treating aPAP. It has also been given a “breakthrough therapy and fast track designation” by the FDA.
Savara expects top-line data from its pivotal phase 3 trial of molgramostim by mid-2024, but the company noted in May that it has enough cash to fund operations through 2025.
Pros and cons
Pros
- Breakthrough therapy and fast-track designations suggest the FDA facilitates molgramostim’s approval process.
- Enough cash to fund current operations through 2025.
- Share price is up in the past year.
Cons
- Large downside potential if molgramostim trial data disappoints.
- Commercialization of molgramostim and profitability may still be over a year away.
- aPAP is an extremely rare disease, limiting molgramostim’s market size.
More details
P/E: N/A.
Iovance Biotherapeutics (IOVA)
Sector
Health care
Market cap
$1.6 billion
YTD performance
-4.85%
What you should know
Iovance Biotherapeutics is a biopharmaceutical startup working on treatments for solid tumor cancer. One of Iovance’s products, lifileucel, is meant to treat cervical cancer and advanced melanoma. However, this is just one of many products in Iovance’s pipeline. The company is also developing several treatments and therapies for various diseases and conditions.
Up to this point, Iovance has minimal earnings and is far from profitability. Nevertheless, most analysts recommend buying the stock right now. Analysts expect the share price to triple (or better) in the next year. Though the stock might be overvalued and the company is losing money for now, its earnings are moving in the right direction.
Pros and cons
Pros
- If approved, lifileucel would be the only therapy of its kind to treat advanced melanoma.
- Developing numerous other therapies, including for nonsmall cell lung cancer, cervical cancer and head and neck squamous cell carcinoma.
- Earnings momentum moving in the right direction.
Cons
- In September 2023, Iovance announced the FDA needs additional time to complete its review of lifileucel.
- Earnings are still deep in the red.
- Cash on hand dropped by $253 million in the second quarter of 2023.
More details
P/E: N/A.
iQIYI Inc. (IQ)
Sector
Communication services
Market cap
$4.2 billion
YTD performance
-15%
What you should know
iQIYI is a Chinese subscription streaming service owned by Baidu. The service allows viewers to stream content from several Asian countries. Viewers can stream content in up to 720P quality without needing a subscription. However, subscriptions add certain benefits, such as higher streaming quality and ad skips.
In the second quarter of 2023, the company’s revenue was up 17% year over year. It posted an operating income of $84.2 million and an operating income margin of 8%, compared to 2% in the same period in 2022. The company has also increased its free cash flow for four consecutive quarters.
Pros and cons
Pros
- iQIYI has nearly quadrupled its year-over-year operating income.
- The company is investing in upcoming technologies like generative artificial intelligence.
- Grew average daily subscribers to 111 million in the second quarter, from 98.3 million during the same period in 2022.
Cons
- Cash on hand has decreased in recent quarters.
- Slim profit margin.
- Share price down by double-digits in the past five years.
More details
P/E: 16.98.
Compare the best penny stocks
| Company (ticker) | Sector | Market cap | YTD performance |
|---|---|---|---|
| VAALCO Energy (EGY) | Energy | $490 million | 8% |
| Ardelyx (ARDX) | Health care | $1.1 billion | 58.42% |
| Savara (SVRA) | Health care | $527.83 million | 148.4% |
| Iovance Biotherapeutics (IOVA) | Health care | $1.6 billion | -4.85% |
| iQIYI (IQ) | Communication services | $4.2 billion | -15% |
Methodology
The best penny stocks included above all trade on a major U.S. stock exchange and meet the following criteria:
- An Altimeter overall grade of A or B. The overall grade takes into account profitability, earning stability, valuation and earning expectations. Grades of B or higher, as of July 31, for both are stocks that are ranked in the top quarter of nearly 5,000 stocks in Altimeter’s stock database, which indicates that these companies have strong valuations with the ability to improve returns.
- An Altimeter risk level of A or B. The Altimeter risk grade is calculated based on a company’s credit rating, management sentiment and a fundamental forensic assessment of its financial health. Penny stocks are inherently risky investments, but screening for stocks with the lowest financial risk helps reduce the chances of significant downside.
- Market capitalization of at least $250 million. Stocks with market caps below $250 million are considered microcap or nanocap stocks, and these stocks are often among the most volatile and risky stocks listed on major exchanges. Stocks with market caps above $250 million are more likely to have analyst and media coverage and plenty of trading liquidity.
- Consensus analyst recommendation of “buy” or better. A strong number of analyst “buy” ratings indicates an expectation the stock will outperform the overall market. At least one “buy” rating by a Wall Street analyst is a vote of confidence from a professional stock picker.
Why other stocks didn’t make the cut
For penny stocks, we didn’t consider companies with market caps of less than $250 million because of their risky nature. We also didn’t consider stocks that exceeded $5 per share.
That said, the price of stocks should not be the sole determining factor for investors. According to Daniel Milan, founder and managing partner at Cornerstone Financial Services, investors should focus on value and business fundamentals, not share prices.
In addition to low share prices, the stocks on this list have underlying businesses that are profitable and/or growing and valuations that indicate significant potential share price upside from current levels.
Final verdict
Investing in penny stocks is not for the faint of heart and comes with sizable financial risk. But top-performing penny stocks can generate tremendous long-term returns for speculators with high-risk tolerances. Penny stock investors can reduce their overall risk by diversifying their portfolios rather than picking just one stock and going all-in.
It can be difficult to hunt down a handful of high-quality stocks among the thousands of low-quality penny stocks in the market. But it can also be an emotionally and financially rewarding experience for successful penny stock investors.
Are penny stocks a good investment?
Most penny stocks are not considered good long-term investments. While there are always some hidden gems among penny stocks, most stocks trading under $5, particularly those trading under a dollar, are cheap for a good reason. In addition, many penny stocks have low trading liquidity. They are extremely volatile, making it easy for investors to lose a large amount of money in a short amount of time.
Most successful penny stock traders don’t think of the stocks as long-term investments and are more focused on timing short or medium-term entry and exit points to turn a profit.
A long-term study of more than 10,000 over-the-counter (OTC) securities, most of which are penny stocks, found these stocks generate an average annual return of -27%.
Risks to consider
The SEC has explicitly warned investors of the risks associated with buying penny stocks, including the “possibility that they may lose their whole investment.”
The low liquidity of penny stocks can make them prone to extreme volatility and even market manipulation by nefarious actors. To make matters worse, limited regulatory oversight of penny stocks opens the door for con artists to orchestrate penny stock scams, frauds and pump-and-dump schemes.
Even penny stock companies that are not outright frauds may have little financial information available for investors to analyze or monitor, making it difficult to know exactly what’s going on with the company.
In a best-case scenario, a penny stock has likely significantly underperformed the expectations of company management or it wouldn’t be trading at such a low share price in the first place. These types of companies can always rebound, but an underperforming company isn’t an ideal investment.
How to buy penny stocks
Most online brokers allow trading of penny stocks that trade on major exchanges, but some limit or restrict over-the-counter stock trading or charge extremely high fees.
Once you identify a broker that allows penny stock trading and has reasonable commissions, consider taking a diversified approach to penny stocks rather than putting all your eggs in one basket. The more diversified your portfolio, the less likely one bad stock pick will lead to a large loss.
It’s usually a good idea to research any penny stock’s trading volume and liquidity before buying to make sure you’ll be able to exit the position when you want easily.
Finally, even if you believe you’ve identified the best of the best among penny stocks, it’s a good idea to heed the SEC’s warning and never invest more money in penny stocks than you would be willing to lose in a worst-case scenario.
Related: Best brokerages for penny stocks.
Tips for trading penny stocks
Trading penny stocks can be risky due to their potential for high volatility and low liquidity. Therefore, you should take a cautious and measured approach when trading penny stocks. Here are some tips to consider:
First, you should learn the basics of stock trading and research each company you are considering. Evaluate its finances, growth potential and business model. Also compare the company to the competition.
Because investing in penny stocks can be risky, it’s important to invest in a well-rounded portfolio of stocks. Consider additional investments, too, like bonds and real estate.
You should never invest money you can’t afford to lose — this point is even more potent with penny stocks. It also may be best to avoid penny stocks if you have a short time horizon for your investments.
Some investors hope to find the “next Netflix” or the “next Amazon” among the droves of penny stocks. Unfortunately, the odds of this are quite low, but you can still earn a reasonable return with careful planning and research.
Pay attention to market trends to make informed decisions. Use technical analysis, charts and watch patterns to predict future price movements.
Also known as margin trading, this involves borrowing money to trade stocks. While this can theoretically increase gains, it also magnifies losses. Given how risky penny stocks can be, most investors should avoid trading on margin.
Penny stocks can provide significant returns, but they also come with a lot of risk, which may not be for everyone. Make sure you do proper research, understand the risks and only invest money you can afford to lose.
Frequently asked questions (FAQs)
Yes, penny stock traders can make huge profits if they time their entry and exit points perfectly and capitalize on the extreme volatility of short-term price spikes in penny stocks. However, identifying these volatile price swings and timing them correctly can be extremely difficult, even for professional traders with years of experience in day trading.
The best penny stocks have strong underlying business fundamentals, attractive valuations and long-term growth potential.
Penny stocks that trade via over-the-counter transactions or on the electronic OTC Bulletin Board system are often lower-quality investments that are subject to less regulatory scrutiny than stocks that trade on a major exchange.
The best penny stock apps are free and easy to use, provide features such as streaming data and real-time alerts and ensure traders get fast trade execution at favorable prices.
Charles Schwab (SCHW) and TD Ameritrade are among the most popular penny stock trading apps because of their low fees and real-time alerts.
Not all brokerages offer penny stock trades. A good indicator of a brokerage that offers penny stocks is one that has full access to OTC or OTCBB-traded stocks since these are typically specialized trades. Some brokerages may even charge higher fees for penny stock trading than others. A few examples of brokerages that offer penny stock trading and access to thousands of OTC and OTCBB penny stocks include Fidelity, E-Trade and Interactive Brokers.
Like any stock, penny stocks can provide positive returns to investors if companies have a sound business model, good management decisions and a competitive edge in the market. Also like other stocks, positive results are never guaranteed with penny stocks. Therefore, it’s best to balance your portfolio with other stocks, such as blue-chip stocks and exchange-traded funds.
As an investment enthusiast with a background in financial analysis and stock market research, I am well-versed in the intricacies of identifying promising investment opportunities. My experience involves thorough analysis of various metrics, including forward price-to-earnings ratios, risk factors, earning stability, and consensus among Wall Street analysts.
Now, let's delve into the concepts and information presented in the article about penny stocks:
Penny Stock Selection Criteria:
Metrics Screened:
- Forward Price-to-Earnings (P/E): Used to evaluate the potential future earnings growth of a stock.
- Risk Assessment: Considered Altimeter overall grade and risk level for profitability, earning stability, valuation, and financial health.
- Market Capitalization: A minimum threshold of $250 million to avoid highly volatile microcap or nanocap stocks.
- Analyst Consensus: Only stocks with a "buy" consensus or better from Wall Street analysts were considered.
Notable Penny Stocks:
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VAALCO Energy (EGY):
- Sector: Energy
- Market Cap: $490 million
- YTD Performance: 8%
- Key Points:
- Texas-based independent oil and gas exploration company.
- Strong production growth despite global energy market disruptions.
- Dividend yield of around 5.36%.
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Ardelyx (ARDX):
- Sector: Health care
- Market Cap: $1.1 billion
- YTD Performance: 58.42%
- Key Points:
- Biopharmaceutical company with positive revenue from Ibsrela.
- FDA approval for Xphozah in kidney disease treatment.
- Regulatory approval in Japan for tenapanor.
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Savara (SVRA):
- Sector: Health care
- Market Cap: $527.83 million
- YTD Performance: 148.4%
- Key Points:
- Clinical-stage biopharmaceutical company focusing on rare respiratory diseases.
- Lead product candidate molgramostim in phase 3 trials.
- Breakthrough therapy and fast-track designations from FDA.
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Iovance Biotherapeutics (IOVA):
- Sector: Health care
- Market Cap: $1.6 billion
- YTD Performance: -4.85%
- Key Points:
- Biopharmaceutical startup with a focus on cancer treatments.
- Lifileucel for cervical cancer and advanced melanoma.
- Earnings momentum moving in the right direction.
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iQIYI Inc. (IQ):
- Sector: Communication services
- Market Cap: $4.2 billion
- YTD Performance: -15%
- Key Points:
- Chinese subscription streaming service owned by Baidu.
- Revenue up 17% YoY, operating income margin increased.
- Investing in generative artificial intelligence.
Methodology for Penny Stock Selection:
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Altimeter Grade Criteria:
- Overall grade of A or B for profitability, earning stability, valuation, and earning expectations.
- A risk level of A or B based on credit rating, management sentiment, and financial health.
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Market Data and Criteria:
- Market data as of Nov. 30.
- Stocks trade on major U.S. stock exchanges.
- Excluded companies with market caps below $250 million and those exceeding $5 per share.
Final Verdict and Risks:
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Investing in Penny Stocks:
- Acknowledges the substantial financial risk.
- Emphasizes the potential for significant long-term returns for high-risk tolerance speculators.
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Risks to Consider:
- SEC warning about potential loss of the entire investment.
- Low liquidity, extreme volatility, and susceptibility to market manipulation.
Tips for Trading Penny Stocks:
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Learn the Basics:
- Research each company's finances, growth potential, and business model.
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Diversify Your Portfolio:
- Invest in a well-rounded portfolio, including stocks, bonds, and real estate.
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Invest Only What You Can Afford to Lose:
- Penny stocks are high-risk; only invest money you can afford to lose.
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Market Trends and Analysis:
- Pay attention to market trends and use technical analysis to predict price movements.
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Avoid Trading on Margin:
- Given the risk of penny stocks, caution is advised against trading on margin.
FAQs:
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Can Penny Stock Traders Make Huge Profits?
- Acknowledges the potential for profits but highlights the difficulty in timing entry and exit points.
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What Makes a Penny Stock the Best?
- Emphasizes strong underlying business fundamentals, attractive valuations, and long-term growth potential.
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Are Penny Stocks Good Long-Term Investments?
- Highlights the generally unfavorable view, citing low liquidity, volatility, and the potential for loss.
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Best Penny Stock Apps:
- Recommends free and user-friendly apps like those from Charles Schwab and TD Ameritrade.
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Do All Brokerages Offer Penny Stock Trades?
- Advises checking if a brokerage has access to OTC or OTCBB-traded stocks and considering fees.
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Can Penny Stocks Provide Positive Returns?
- Acknowledges the potential for positive returns but advises balancing the portfolio with other stocks.
In conclusion, the article provides a comprehensive overview of selected penny stocks, the methodology behind their selection, associated risks, and practical tips for trading. The information is presented with a nuanced understanding of the challenges and potential rewards associated with penny stock investments.
