When it comes to equities, most investors realize a stock’s price per share isn’t a particularly good barometer of how expensive or inexpensive it is relative to its intrinsic value. Still, it’s a fact that some stocks are simply more affordable than others, such as penny stocks.
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Penny stocks — those trading below $5 per share — have been known to seduce many a retail investor with their potential for outsized upside, only for that optimism to be punished by crushing losses.
For the risk-tolerant speculator willing to do the homework, there are always penny stocks available that offer an attractive risk-reward profile, especially as they near the $5 threshold.
The $5 Threshold Strategy
Institutional investors, such as pension funds, shy away from penny stocks and can even be required to sell securities that fall below the $5 mark due to the risk involved.
When an issue rises above $5, however, institutions may become buyers, and sell-side analysts may be more inclined to initiate research coverage. This phenomenon underpins the $5 threshold trading strategy.
Stocks To Watch
1. Helios and Matheson Analytics Inc HMNY 1.14%
While the data analytics company has seen its stock price languish ever since the announcement of another dilutive offering — not its first, and perhaps not its last — the CEOs of both Helios and subsidiary MoviePass aren’t shy about engaging with media.
With the stock still sensitive to headlines, and considering the company said in a recent interview it’s examining partnerships with everyone from ride-sharing services to Amazon.com, Inc. AMZN 0.35%, an announcement could come any day that would send the stock rocketing higher, giving investors a chance to lock in short-term gains. There’s also the possibility it could bring MoviePass public. That being said, this is one of the market’s more volatile and polarizing stocks, so caution is recommended.
2. Pandora Media, Inc P 1.81%
The streaming music platform saw its market cap fall off a cliff when investors awaiting a speculated acquisition by Sirius XM Holdings Inc SIRI 0.85% were instead treated to news of a “strategic investment” back in November. More recently, the company issued underwhelming guidance when it reported fourth-quarter figures in February.
Still, some were encouraged by management’s renewed focus on profitability. Wedbush’s Michael Pachter said the market is heavily discounting the size of Pandora’s user base. Pachter also said he believes the potential remains for an acquisition, and he’s not alone. BMO Capital Markets’ Dan Salmon even said Sirius XM could wind up being that acquirer. Last summer, it was rumored Sirius had offered $8 per share.
3. RLJ Entertainment, Inc RLJE 7.04%
RLJ Entertainment, the digital media company helmed by BET Networks founder Bob Johnson, received an offer from AMC Networks Inc AMCX 0.53% on Feb. 26 to acquire majority control of the company. AMC Networks already bought about a 26-percent stake in 2017, with an option to purchase majority ownership.
In a Benzinga interview in 2016 following a streaming partnership between the two entities, RLJ said the deal could “result in something bigger than we ever planned.”
The deal aside, RLJ recently reported subscriber growth of 55 percent year-over-year, and boasts the vote of confidence of a recent stake taken by GAMCO Investors, according to a Feb. 28 13D filing. The company has convened a special committee to review the AMC offer, which is only $4.25 per share. Given that the stock has traded above that level since Feb. 27, it appears the market could be expecting AMC to up its bid — or for a competing and larger bid to come through.
4. VBI Vaccines Inc VBIV 0.51%
VBI closed both 2017 and opened 2018 with news of dosing beginning in its Sci-B-Vac and VBI-1901 vaccines, respectively. This stock is a favorite among institutional investors, including noted biotech hedge fund Perceptive Advisors, which reported an increased stake in the company in its most recent 13F filing.
Noting “multiple clinical data readouts” expected this year, BMO analyst Do Kim late in 2017 set an $11 price target, saying VBI’s earlier stage clinical pipeline could drive significant share upside in 2018.
5. Zynga Inc ZNGA 3.58%
Shares of this “social gaming” company haven’t traded above $5 for more than a year, and took a tumble after the company’s disappointing Q1 guidance reported on Feb. 7. Still, the stock has its fans, including Omega Advisors’ Leon Cooperman. Cooperman first took a stake in the stock in early 2017, and has added to his position on a couple of occasions, including during the most recent quarter, as evidenced by his latest 13F filing.
Wedbush’s Pachter raised the price target from $4.85 to $5.50 following Zynga’s Q4 conference call, calling it “a compelling investment” and noting that the company has exceeded its bookings guidance for 12 consecutive quarters.
With the launch of at least one new game promised for the second half of the year, Pachter expects bookings could meet or exceed estimates of $935 million for 2018.