Rare Investment Opportunities: Penny Stocks With Earnings:

This week, we came across a list of interesting stocks. They’re cheap stocks with earnings. This is unusual because many low priced stocks, those trading less than $5 a share, don’t have earnings. These are often companies with potential, but risk.

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  • Their potential makes them appealing as investments. But, the potential lies in the future. The income statement of any company reflects the past. It’s possible the past may not reflect the potential, especially in the case of stocks that are developing new products.

    Penny Stocks: Definitions and Risks

    Penny stocks might have a bad reputation and the reputation is earned in many cases. This is because some of the stocks are outright frauds and others lack viable business plans. In other cases, the stocks do offer potential rewards.

    The Securities Exchange Commission (SEC) tells us that the term "penny stock" generally refers to a security issued by a very small company that trades at less than $5 per share. The Commission notes there are risks associated with these investments.

    Specifically, the SEC warns that “investors in penny stocks should be prepared for the possibility that they may lose their whole investment (or an amount in excess of their investment if they purchased penny stocks on margin).” This is a warning all investors need to keep in mind.

    One advantage of stock market trading at a low price is that they are capable of delivering large returns, in percentage terms. For example, if a company delivers good news, it’s possible the stock could move from $1 to $2 a share, a 100% return.

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  • Finding Potential Winners

    Because of the potential gains, we frequently screen for low priced stocks that could be attractive Investment Opportunities. This week, we screened for stocks priced below $2. To be certain they were tradable, we required the average daily volume to be at least 500,000 shares.

    Using the free screener available at FinViz.com, it’s possible to scan a list of stocks for a variety of criteria. We focused on earnings. We wanted to see a history of earnings.

    To find these stocks, we required the price to earnings (P/E) ratio to be positive (greater than 0). We also required the earnings per share (EPS) growth rate over the past five years to be greater than zero. The criteria are shown in the diagram below.

    We found six stocks.

    Low Priced Because of a Decline

    There are, of course, two ways a stock can become low priced. One way is to always have been low priced. The second way is to have a steep decline. That’s the way the first stock on our list became low priced.

    MannKind Corporation (Nasdaq: MNKD) once traded near $25 a share. The chart below is adjusted for a 1:5 reverse stock split earlier this year. The company completed that action after the price fell below $1.

    MannKind has been working on developing an inhalable version of insulin, Afrezza. The prospects for the drug seem promising. It’s believed inhaled insulins are more rapidly absorbed than injected insulin, with faster peak concentration in serum and more rapid metabolism.

    But, the commercialization of the drug has been a problem. The ups and downs of that process can be seen in the long term chart of MNKD shown above. The company went public in 2004 and in 2009 they submitted an application to the Food and Drug Administration (FDA) for approval of the drug.

    In 2011 the FDA denied approval of Afrezza and requested additional clinical trials. After conducting further studies, Mannkind submitted a new application, and in June, 2014, the FDA approved Afrezza for both Type I and Type II adult diabetics, with some restrictions.

    That year, Mannkind and Sanofi agreed that Sanofi would manufacture and market the drug but sales were poor, just $7.5 million in 2015, and the companies formally terminated the agreement in November 2016. MannKind continues to pursue efforts to boost sales and if they are successful, the stock could soar.

    MannKind could also be a buyout candidate as the drug sector consolidates. But, the company’s history illustrates the problems with low priced stocks. Afrezza seemed destined to be a blockbuster drug but has disappointed.

    Other Low Priced Buy Candidates

    The other companies that passed our screen are also fallen angels, so to speak. Each of these companies at one time traded for a much higher price. Their current prices reflect disappointing results in the past. However, an alternative way to view this situation is that the former highs show the potential of the stock.

    Some stocks display extraordinary volatility because of their business. This is true for gold miners in general but Harmony Gold Mining Co. Ltd. (NYSE: HMY) is an unusually volatile gold mining company.

    Harmony engages in the exploration and mining of gold in South Africa and Papua New Guinea. In addition, the company explores for copper, silver, uranium, and molybdenum deposits. It has nine underground operations located on the Witwatersrand Basin; an open-pit mine in the Kraaipan Greenstone Belt; and various other surface operations in South Africa.

    The company also owns interests in the Hidden Valley, an open-pit gold and silver mine; the Wafi Golpu project in Morobe province; and the Kili Teke gold-copper exploration project in Papua New Guinea.

    The chart below shows the stock’s volatility.

    Analysts expect the miner to report EPS of $0.38 this year, $0.32 next year and $0.54 the year after that. If these estimates are correct, the stock is trading with a P/E ratio of about 6 based on next year’s expected earnings. The average P/E ratio for gold miners over the past seven years has been 35.4.

    Even at half that value, HMY could deliver an extraordinary gain. A P/E ratio of 17 would mean a stock price of more than $5.

    HMY presents news related risks as well. An earthquake in South Africa led to five miners being trapped underground in one of its mines.  Tragedies like this are a risk in the mining industry and Harmony responded appropriately, working to recover the miners’ remains as quickly and safely as possible.

    More conservative investors may want to consider Asanko Gold Inc. (NYSE: AKG). This company engages in the exploration, development, and production of gold properties. Its principal project is the Asanko Gold Mine, which consists of two gold projects, such as the Obotan Project and the Esaase Project located in the Amansie West District of the Republic of Ghana, West Africa.

    Other potential buys include:

    • Nobilis Health Corp. (NYSE: HLTH) owns and manages ambulatory surgical centers (ASCs), as well as acute-care and surgical hospitals. The company’s healthcare facilities provide surgical procedures in various clinical specialties, including orthopedic surgery, podiatric, vein and vascular and pain management.

    HLTH also provides marketing services, patient education services, and patient care co-ordination management services to third party facilities and physicians. As of December 31, 2016, the company owned and managed 10 ASCs, 4 surgical hospitals, and 5 clinics.

    • Hovnanian Enterprises, Inc. (NYSE: HOV) designs, constructs, markets, and sells residential homes throughout the United States. The company constructs single-family detached homes, attached townhomes and condominiums, urban infill, and active lifestyle homes.

    HOV also markets its build homes for first-time buyers, first-time and second-time move-up buyers, luxury buyers, active lifestyle buyers, and empty nesters in 167 communities in 33 markets.

    In addition, the company provides financial services comprising originating mortgages from homebuyers and selling such mortgages in the secondary market, as well as offers title insurance services.

    • VIVUS, Inc. (Nasdaq: VVUS) is a biopharmaceutical company that develops and commercializes therapies to address unmet medical needs in the United States and the European Union.

    The company offers Qsymia for the treatment of obesity and STENDRA, an oral phosphodiesterase type 5 inhibitor for the treatment of erectile dysfunction.

    It is also developing Qsymia, which has completed Phase II studies for the treatment of obstructive sleep apnea and diabetes, as well as for other obesity-related diseases, including nonalcoholic steatohepatitis, nonalcoholic fatty liver disease, hyperlipidemia, and hypertension.

    In addition, the company is developing Tacrolimus, which has completed Phase II studies for the treatment of pulmonary arterial hypertension.

    The company also has license and commercialization agreements with Berlin-Chemie AG and Auxilium Pharmaceuticals, Inc. to commercialize and promote STENDRA; and with Sanofi Winthrop Industrie to commercialize and promote avanafil.

    All of these stocks carry risks, but they also offer potential rewards.


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