Pennies From Heaven: My Low-Priced Stock List For 2020

Summary

Penny stocks are a terrible investment. These aren't traditional long-term investments. Though you should expect to hold any of these stocks for a long time, they aren't classic investments.

Yet there's leverage. If you can find a nugget among the dross, it can be rewarding. Expect to lose money on several, and hope one makes up for it.

I started thinking about penny stocks because small caps are having their day now. The interest rate is low and debt is relatively easy to get.

M&A is now part of my calculus in stock picking. It should be part of yours too.

Why low-priced stocks?

Because by definition, they have operating leverage and losses that offer “carryforwards,” meaning that the losses accumulated in the past can now be used to shelter new earnings. This necessitates the notion that these stocks are generally involuntarily at low prices. Another moniker for these extreme-value names are “penny stocks.” As such, these are very risky names. Truth be told there's a good chance that one of the names below are going to go bankrupt. You also must hold these for a long time before or if you ever get the expected return. That means you really have to understand the value proposition and understand what will turn around the underlying business. You often hear about the value strategy being looking for broken stocks, not broken companies. In this case, these are possibly broken companies that can hopefully be resurrected. If that happens you could see double, triple, quadruple and more returns (or zero).

Why Now?

This is a topic that I will explore a bit more tomorrow, but I believe that the individual investor is returning to the market. This is part of my Melt-up - Meltdown prediction. If the melt-up is real stock market sentiment should transition to a higher level of optimism. The truth is there's a lot to be optimistic about. Just this morning we learn that China is buying the most soy products in two years, and news that they arrested 107 mainland Chinese for counterfeiting a German adhesive product. The US-China trade war has reached an armistice. As trade recedes into the background, oil prices are firming to the level where many if not most US frackers can make money. This will boost the heartland. With Jobs plentiful and wages rising the uptick in gasoline prices will not dampen spending habits as much as in the past. One might even be optimistic enough to believe that these E&P companies have found an equilibrium with global competitors. I see a similarity to airline ticket pricing, DRAM capacity and its relationship to capacity - -quilibrium means better profitability. Underlying all of this is persistently low interest rates and a low regulation environment. Low interest rates and fintech competing with banks have boosted lending to small and struggling businesses, and even consumers. With all these factors, individual investors looking for leveraged opportunities and hedge funds looking for “catch-up” trades favors small-cap stocks. The Russell 2000 Small-Cap Index ETF (IWM) shows a step change, here.

saupload_cPbQ4n9ji9O7zwNaQfYGhmA4QbeVj48TKJPP8gBxMu4u_1RWheHt4IGn0b0CKJE9TXr_tUBLGtOwaWgEObtuoBGBQaWOS4CwSmqQsPr8TMEyDb0TlxgTMbYot3RhVbyM9TziP5zE_thumb1.png

This is an uncomplicated chart. You pretty much see that the IWM has been chopping around in the same channel for most of the year. Until the last six to seven weeks, when the Russell woke up and is following the S&P 500. So my thinking is the small-cap names will continue with the rest of the market now, and may even outperform, especially when energy stocks finally break above their trading range. Of course, the names below have individual problems and once they fix their problems their rallies will be independent of the current market movement. That said, the economic conditions have bought them time and improved their chances to return to solvency and even growth. Again the other side of this is nothing - no growth, no improvement, and bankruptcy.

Hopefully, I have laid the table for you and you understand that these are very risky names. So please, don’t risk more than the equivalent of the change that has fallen into the cushions of your couch. On the other hand, one of these names, hopefully, will gain a few hundred percent in appreciation. Below is my list, the price, and how they caught my attention. In all cases but especially with these names you MUST do your own research and make your own decision. Please don’t risk more than an expensive dinner or a day trip on any one name. If you see that a name is really moving you can always add more to it if the news flow turns positive.

Netlist (OTC:NLST) .30 - Attracted by the news flow, tiny NLST wins multiple patent rulings against memory juggernaut Hynix, good hiring of sales professionals. Now Hynix is appealing and the decision will be determined February 21. This is a binary event. If NLST wins again, the stock should do extremely well. With the declarations that memory has turned the corner, it seems to me that NLST could be in the same ecosystem as PureStorage (PSTG). NLST builds value-added hybrid DRAM/NAND storage for high-performance computing. One big red flag is consistent insider selling from the CEO. However, if DRAM/NAND pricing is turning around, especially due to demand from the data center and cloud, NLST could be bought. It all depends on the ruling. On the other hand, Hynix having lost before may just settle before the court date. The selling by the CEO might be saying that he's not so confident. Or it could be many reasons. It’s 0.30 cents, treat it like an option, again, think of this as a lottery ticket. Buy 100 shares (after you’ve done your own due-diligence) and forget about it. Maybe this isn’t your thing, then don’t do it.

Chesapeake (CHK) .93 - Attracted by insider buying. With the turn in energy prices, and the growth in LNG. CHK has been moving away from natural gas to oil. It recently refinanced, buying more time. At the time I highlighted this name, I believe CHK was trading at 70 cents. I like to see insider buying, there were several different buyers and multiple buys. There are a whole bunch of tiny E&P oil companies that used to be much higher. Who didn’t get killed speculating in this sector? Once burnt, twice shy, yet I am intrigued.

Transenterix (TRXC) .7 -- This name has been on my med-tech stock list, and I watched it plummet. It was trading for pennies until recently, now it's trading above a , so I took a look. It’s up for the worst reason, a reverse stock split, this means 10 shares become 1. A reverse stock split usually is not a good sign. It's essentially rearranging the deck-chairs type move. Market participants abandoned TRXC because sales dried up. In defense of TRXC, sales for a disruptive medical technology - robotic laparoscopy - can be lumpy. Sales can be corrected and may even stabilize on its own accord over time. The reverse split and some financing have bought some time for TRXC and the new management.

I read the earnings transcript. There are a new CEO and CFO, which is clearly a good thing. The CEO gave a good explanation of why there was sales difficulty - go to market was the problem. A “capital sales” approach was too tactical. The strategy should have been to build a track record of better results. The initial product was rushed out of the door as done and dusted. Instead, they should have piloted the product, worked out the bugs, established the benefits and then sell more aggressively. They are now implementing this new sales and marketing strategy, publishing benefits and getting testimonials.

The business benefit for TRXC besides better results (3MM size makes for faster healing) is prolonging the careers of lapriscopicists. This surgery specialization requires complex psychomotor skills. Successful experts in laparoscopy display greater “movement economy,” consistency, and automaticity of performance. Surely robotic assistance can only enhance that. At the least, it can prevent Laparoscopic Surgeon's Thumb. It can steady an older surgeon’s hand and improve “movement economy” or prevent degradation. Keeping older surgeons active with their clinical experience on the job, doing what they do, and conveying their knowledge to the next generation is a big benefit for the customers - the hospitals. Yes, TRXC may not solve its sales problem and become insolvent, or it can turn around. Again, make your own decision. I’m going to buy 100 shares in the next few days. If sales improve next quarter I will add to it. If not I lost 0 bucks

GlobalSat (GSAT) .55 - I'm attracted to GSAT because of insider buying. I believe that the premier provider in this space is Iridium (IRDM). IRDM has a brand-new constellation of satellites. They are getting prestige service providers. IRDM runs the satellites and offers an IaaS-type capability. All that said GSAT and ORBC offer many of the same services, and other new players are coming into the market. I suspect that these smaller players will be consolidated to better compete with the Spacex (SPACE) offering, for example. Orbcomm Inc. (ORBC) has been cited as a conventional value story stock as well, so I'm including them with GSAT. Obviously, GSAT is cheaper per share and has had very nice insider buying. IRDM used to be on this list, especially after the SpaceX rocket carrying its satellite blew up on the launchpad. Now that all its birds are in the sky, IRDM has soared. I think it’s going higher as new services are added. I think there's room for several competitors. Everyone is gaga over 5G, yet space is very hot too. This is the best way to play the space economy. Satellite communications offer ubiquity whereas 5G which stresses high performance and will never have the same coverage, not in the blue ocean or on airliners. The huge value will be created for IoT applications in logistics and passenger jets. Again, GSAT is a penny stock. I bought 150 shares. If you buy, make sure you understand this space. You may decide that IRDM is the name to buy, or spread your bets among the three.

DEACW .10 - I spoke about Diamond Eagle Acquisition Corp (DEAC). Check out Tuesday’s piece for the details on DEAC. The point I want to make here is that DEACW as the warrant of DEAC gives you leverage, with the strike price of .50. Even if you like this investment idea, you should not buy this name now. I expect some kind of correction late January, and a name like this should get hammered. Bide your time. The reverse merger is supposed to happen sometime in the first half of 2020. If you’re afraid the merger will go through Jan. 1, which I doubt highly buy a tiny bit now, then wait a few weeks. Even if the meltdown doesn’t happen, I expect the news flow to dry up as they are working out the deal and DEAC should fall.

Groupon (GRPN) .34 - At first I selected Groupon because there have been recurrent rumors of it being an acquisition target, variously Bookings.com and Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL). I credit Victor Anthony of Aegis Capital with the idea that GRPN could merge with Yelp. It then occurred to me that they both could be acquired by Interactive Corp (IAC). They just spun out Angie's List and recently announced spinning out Match as well. So even though IAC just acquired Care.com, they could do more than one at a time. Merging two (GRPN and YELP) is not an unusual feat either since they acquired Angie’s List and merged it with Home Advisor. I think Groupon/Yelp would be a perfect acquisition target. Groupon is a great brand and in the right hands could do very well.

Fannie Mae (OTCQB:FNMA) .12 and Freddie Mac (OTCQB:FMCC)  - These names have been on my list for years. I thought that with a Republican administration that they would finally turn these companies loose. I have written about this situation many times, and the media has covered it very well. If Trump wants to help housing, freeing these companies from onerous confiscation of profits, and allowing FNMA and FMCC to package up mortgages and sell them, lowering prices and making mortgages easier to get, would be the move to make. There has been a lot of chatter for reform. Reform can be that these two companies are federalized completely and taken off the market, or more likely these companies go through a huge secondary offering with a final payment to the Fed and then using the rest as a cash cushion against future losses. FNMA and FMCC then can start paying dividends and behaving like a normal financial institution. The fact that has taken years doesn’t inspire confidence. Again do your own diligence, don’t buy more than you can afford to lose.

BlackBerry (BB) - .36 and is growing again. I could see Broadcom (NASDAQ:AVGO) buying BB. John Chen is one of the best software CEOs around and could run Hock Tan’s entire enterprise software business. BB could be an “acquihire.” Hock Tan can worry about what next company to buy and Chen can worry about integrating the software companies and getting the most out of them. John Chen certainly had his hands full with BlackBerry. Moving away from making cellphones was painful and slow. After making that transition he made some savvy acquisitions, the most recent and best is Cylance, a cybersecurity startup similar to Crowdstrike. I could see Broadcom buying it for all the pieces, its secure-email software, and its IoT software QNX still the premier operating system for cars. BB announced its quarterly results before the market opened on Friday, Dec. 20. The company reported .03 earnings per share for the previous quarter, beating the consensus estimate a penny. The company had revenue of 0.00 million for the quarter, compared to the consensus estimate of 6.31 million.The company's quarterly revenue was up 22.8% on a year-over-year basis. BlackBerry also updated its FY20 guidance to .06-0.08 EPS. Just to keep it real, I originally recommended BB at around a number of years ago. I hold John Chen in great esteem, he's one of the best enterprise software leaders anywhere. Even if BB isn’t acquired, it looks like BB has turned the quarter and Mr. Chen will continue to make savvy acquisitions of software tech and build BB. This is a true “value” oriented type acquisition, except there's no dividend. You need to understand the business or at least read up on Chen’s accomplishments. This is not the first turnaround he has made. If you like what you see, make a small investment, and prepare to hold for a long time before you see results.

Tellurian (TELL) - .37 TELL is a mini Cheniere (LMG) started by the founder of LNG and some of the original executives and hoping for a second act. I think that the story of LNG is not fully understood and appreciated. TELL is different than LNG in that it has ownership in the entire chain, fracking E&P, pipelines and the trains (being built). I like this set-up. I don’t see TELL going belly up, though it has traded as high as . I believe that eventually in a number of years, TELL will likely provide a dividend, unless it gets bought first. If you don’t think you can understand LNG and the value prop, don’t buy this name. There will be many twists and turns.

M&A is Now Part of My Calculus

You may have noticed that I mentioned M&A in many of these names. This because acquisitions are going apace. In fact right before Christmas we had another takeover announcement. Wesco (WCC) made an offer for Anixter (AXE) a B capitalization company. That’s all fine. What's interesting is that AXE was already being bid on by a private equity company. So now we are seeing bidding wars for companies. This has all kinds of implications for the health of the stock market and the whole melt-up scenario. That aside, when I'm looking at a stock and I have a choice between a company in a sector that's consolidating, all other things being equal, I will choose a likely acquisition target.

My trades: I am still holding Splunk (SPLK), Hubspot (HUBS), and Boeing (BA) Calls. I am more active in my long-term investment account, and perhaps I will address my activities there tomorrow.

Disclosure: I am/we are long GSAT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have a small position in GSAT shares in my investment account. I will be buying some TRXC in the next day or so.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

0
0
0
0
0
0
0 0 1149
Submit comment
    No comments yet

Beware The Siren Song Of Ever Rising Tech Big Caps, Biotech Still Interesting

Jan 30 2020 - Facebook Beats Yet Selling Off Hard - Canary Meet Coal Mine

Sept 13 2020 - We Are No Longer A Free Market

Apr 19 2020 - Gilead, Remdesivir, COVID-19 And Political Risk

Feb 01 - Fear Not The Forces Of Reddit, Nor The False Prophets Of Bubble Doom

Apr 19 2020 - Why Gilead's COVID Drug May Be The Magic Bullet We Need

June 23 2020 - Dell Spin Off Of VMWare - Good News For The Market? Hardly...

Jan 3 2019 - Don't Panic Sell, Buy Instead: Time To Deploy Some Of Our Cash

Submit media
Enter your nickname

Show

Show

Enter your email address and we will send you an email explaining how to change your password or activate your account.

Back to login form

Close