Market sentiment is turning from risk-off to risk-on. As this shift happens, penny stocks are gaining traction.
Penny stocks are commonly defined as stocks that trade for less than $5 per share. Because of their low outstanding share value, penny stocks almost always carry small market capitalizations.
The allure of penny stocks is easy to see. A little investment can go a long way. But penny stocks are also loaded with risk. For starters, because they have a small market cap, these stocks have less liquidity than other stocks.
The low price is also a Catch-22. Because of their low price, institutional investors largely avoid these stocks. But without the backing of institutions, it’s extremely difficult for retail investors to move the price higher.
Additionally, many of these stocks receive little to no coverage from the analyst community. Retail investors are literally on their own. Add in the fact that many of these companies are not profitable, and you can understand why penny stocks are only for risk-tolerant investors.
But if you have some speculative cash to invest, some penny stocks have a place in your portfolio. In this article, you’ll get two penny stocks to consider buying and one that you should avoid.
Penny Stock to Buy: FuelCell Energy
FuelCell Energy, Inc. (NASDAQ: FCEL) provides hydrogen fuel cells for applications like on-site power generation, carbon capture, and hydrogen-based storage. The company’s customers include utilities, hospitals, and governments.
Clean energy is at the beginning of what will likely be a multi-year bull cycle. And when it comes to clean energy, hydrogen is one of the cleanest options. And in 2023, governments around the world are pumping money into getting greener and cleaner. For example, the Inflation Reduction Act of 2022 provides incentives to companies that transition to hydrogen.
That dovetails nicely with a series of large-scale projects that FuelCell expects to come online sometime this year. That will help the top line but also move the bottom line closer to profitability.
FCEL stock will still require patience, but with dollars beginning to match political will, the bottom may be in. FuelCell analyst ratings on MarketBeat give FCEL stock a Hold rating with a 34% price target upside.
Penny Stock to Buy: SoundHound AI
It’s no surprise that an artificial intelligence stock would be considered a penny stock to buy in 2023. Nevertheless, you still have to be careful with this sector. Many of these AI start-ups will not live up to the hype.
But that doesn’t appear to be the case with SoundHound AI Inc. (NASDAQ: SOUN). The company is becoming a leader in conversational AI technology. This is distinct from generative AI in that it looks to allow AI models to process speech in a manner similar to the human brain.
It’s not surprising that the company is partnering with the automotive industry. The company believes that, in time, 90% of all new cars will include voice assistants. SoundHound also recently contracted with Airmeez, a customer engagement platform, to develop the company’s intelligent voice assistants.
SoundHound is not expected to show a profit until 2025. However, with $125 million in new funding secured, investors shouldn’t be overly concerned about share dilution. That should make investors feel better about buying SOUN stock at its current levels and watching it grow over time.
Penny Stock to Avoid: Opendoor Technologies
In many cases, a penny stock trades like a penny stock for a reason. And often, the reason is explained by the company’s business model. That’s the case with Opendoor Technologies, Inc. (NASDAQ: OPEN).
If you’re not familiar with Opendoor, the company offers an online platform that allows homeowners to buy and sell their homes without a realtor. The concept is to simplify the real estate process.
Putting this stock as a Sell is not an indictment of the company’s business model. It’s more an issue of the right concept at the wrong time. The housing market is plodding along, but it’s not like it was in 2020 when Opendoor went public.
And that’s reflected in the company’s revenue. In the company’s last quarter, revenue was sharply lower on a year-over-year basis. Opendoor is not profitable, so there’s no price-to-earnings ratio to look at, but the company’s price-to-sales (P/S) ratio is far below the sector average and may have a further fall.
Opendoor analyst ratings on MarketBeat do give OPEN stock a Hold rating with the potential for a stock price gain of approximately 19%. That would put it just above the $5 mark. But without a firm housing outlook, there are better options.