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A tried-and-true strategy for finding stocks to buy is to look in sectors of the economy that are growing or likely to. Although penny stocks carry more risk than higher-priced (and more well known) stocks, investors can use the same strategy to identify the most promising penny stocks.
In 2023, three popular sectors are artificial intelligence, biotechnology, and the recent output cut announced by OPEC is putting the energy sector back in the spotlight. This article looks at one penny stock from each of these sectors.
Penny stocks appeal to risk-tolerant investors. While some investors consider penny stocks to be those with a price under one dollar, many investors have a broader definition that includes any stock that’s trading for under $5.
The allure of buying penny stocks is that a relatively small investment can go a long way. And many stocks also carry small market capitalizations.
This is another reason to consider putting a penny stock or two on your watchlist. When equity markets turns from bearish to bullish, small-cap stocks have a history of leading the rally. Here are three of the most promising penny stocks for risk-tolerant investors to consider.
VAALCO Energy (EGY)
Oil stocks are back in vogue after OPEC announced it would cut its oil production by one million barrels a day starting in May. That makes now a good time to look for small-cap companies among the most promising penny stocks. And VAALCO Energy (NYSE:EGY) a compelling choice.
The Houston-based independent exploration and production company has a market cap of just over $534 million. VAALCO grew its year-over-year revenue by 78% between 2021 and 2022. It’s expected that the company will sustain an average of 29% growth in revenue over the next five years.
Earnings should grow strongly at an average pace of 11.65%. That makes EGY stock attractively valued at just 4.3x earnings with a dividend that currently yields over 5%.
EGY stock was up approximately 10% in 2023 before falling about 20% in the March sell-off. But the stock was already about 1% from that point before the OPEC announcement. With a tailwind of higher oil prices in front of it, now may be a time for investors to climb aboard.
SoundHound AI (SOUN)
SoundHound AI (NASDAQ:SOUN) is a way for investors to buy a penny stock tied to the artificial intelligence space. Investors are pouring money into artificial intelligence stocks and with good reason. As of 2022, the global AI market was valued at over $136 billion. The sector should have an average yearly rate of increase of 38.1% from 2022 until 2030.
SoundHound is working in a niche of AI focused on conversational AI technology. The company’s own research projects that 90% of all new vehicles will include voice assistants with over 75 billion connected devices operating globally by 2025. SoundHound is already seeded with some of these companies.
SOUN stock spiked in January on the announcement of a partnership with Airmeez, to power its customer engagement platform. But the stock price has almost been cut in half since that time. Analysts have a price target of $4.90 which suggests a nearly 100% gain from the stock’s current level.
Bionano Genomics (BNGO)
The last of the most promising penny stocks to consider is Bionano Genomics (NASDAQ:BNGO). The company is on the forefront of optical gene mapping (OGM) technology with its Saphyr system.
Since launching the Saphyr system, Bionano has been consistently growing revenue. In fact, revenue in the first three quarters of its 2022 fiscal year has already exceeded the revenue the company delivered in all of its 2021 fiscal year.
But profitability is a different story. The company won’t be profitable for several years. That makes me consider two things. First is the company’s debt situation.
Right now, the commonly used metrics such as the Quick Ratio, Debt-to-Equity Ratio and Current Ratio are in-line with the sector averages. This suggests that, for now, investors shouldn’t be too concerned about a need for the company to do another share offering.
Second, I look at short interest. BNGO stock has a short interest ratio of 17%. And more importantly short traders would need about eight days to cover their positions. This combination makes the stock ripe for a short squeeze, but for now volume suggests the bulls are staying away.
On the date of publication, Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.