The inclusion of penny stocks to a well-diversified portfolio reduces exposure to general market risk while providing an opportunity to achieve extraordinary returns. However, the financial marketplace isn’t Utopia. Higher risk-taking raises the probability of losing money. As such, it’s pivotal to perform objective due diligence before committing to penny stocks.
I scanned through my most recent investment notes to seek out penny stocks that could become multi-baggers in due course. It made for tough filtering as the market is propped up with numerous overvalued micro and small-cap assets. However, I identified three gems with alluring prospects. Let’s traverse into a discussion about each of them!
Creative Realities Inc (CREX)
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Creative Realities (NASDAQ:CREX) is a digital signage company that operates via two digital signage segments – solutions and software. The firm is perfectly placed to take advantage of an era wherein content creation and advertising are flourishing. Moreover, its integrated business model allows it to streamline its signage business. Concurrently, it delivers enhanced profitability to its shareholders, among other factors.
The firm released mixed third-quarter results in November, yet its cumulative six-month return sits above 80%. I think the market overlooked Creative Realities’ 12-cent third-quarter EPS miss for numerous reasons.
Firstly, the company reported an immaculate record run rate of $15.6 million in its third quarter and expects an $18 million run rate for its full year. The strong run rate is largely due to exponential customer acquisitions and continuous value-additivity via its customer management system software. Also, the market loves CREX because of its robust gross profit margin of 45.8%, which might be a leading indicator of incoming bottom-line profitability.
Lastly, Creative Realities’s price multiples suggest the stock is trading at a bargain price. For instance, CREX’s price-to-sales ratio of 0.66x is severely compressed, while its price-to-book ratio of 1.35x is at a 26.79% 5-year discount.
Quarterhill Inc (QTRHF)
Cars on an urban highway driving into the sunset
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Quarterhill (OTCMKTS:QTRHF) is a Canadian-based firm that operates in various intelligent transportation systems and intellectual property licensing industries.
Also, the company owns IRD, which is primarily a software firm that manages traffic flow on more than 16,000 roads. In addition, Quarterhill owns ETC, an entity offering a cloud-based mobility system to tolling stations with particular value additivity to back-office and roadside functions.
Further, the company’s corporate strategy is to utilize its existing cash flows to leverage investments in intelligent transportation systems and adjacent markets. Although it has a negative cash position, Quarterhill’s five-year CAGR of 26.14% suggests its projects will deliver future value to shareholders. Moreover, the company has a consistent contract flow. For instance, it only recently secured a three-year C$4.1 million transportation contract from the North Carolina Department of Transportation.
Quarterhill’s stock is well-placed from a valuation perspective. QTRHF has a price-to-sales ratio of merely 0.62x and sports a price-to-earnings ratio of 22.05x, 23.38% lower than the sector average.
Travelzoo (TZOO)
TravelZoo (TZOO stock) website zoomed in on the logo
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Finally, Travelzoo (NASDAQ:TZOO) is underestimated. The substantial growth in affordable travel, frontier location holiday destinations, and continuous population growth are key drivers behind its business, which is advertising travel deals.
Although Travelzoo’s small market share of 0.24% doesn’t provide it with pricing power, the company possesses solid fundamentals. For example, Travelzoo’s earnings before interest and tax margin of 17.91% is accompanied by a 7.24% three-year CAGR. This suggests that Travelzoo has tapped into a lucrative subset of the travel advertising market.
In fact, Travelzoo’s recent third-quarter earnings results provide substance to the data. The company achieved $20.6 million in quarterly revenue, up by 30.4% from a year ago. In addition, TZOO’s EPS settled seven cents above target, illustrating a solid income statement. Much of the firm’s recent success is due to continuous membership via international expansion. This reach could lend Travelzoo perpetual growth and build on its impressive retrospective financial results.
TZOO is undervalued for two reasons. Firstly, its forward price-to-earnings ratio of 10.31x is at a five-year discount of 52.72%, showcasing relative value. Moreover, Travelzoo announced a 1 million share buyback plan in October, which will naturally drop investors’ cost basis.
Travelzoo’s fundamental and capital market-based variables are aligned to deliver stellar returns to its shareholders.
On Penny Stocks and Low-Volume Stocks: With only the rarest exceptions, InvestorPlace does not publish commentary about companies that have a market cap of less than $100 million or trade less than 100,000 shares each day. That’s because these “penny stocks” are frequently the playground for scam artists and market manipulators. If we ever do publish commentary on a low-volume stock that may be affected by our commentary, we demand that InvestorPlace.com’s writers disclose this fact and warn readers of the risks.
On the date of publication, Steve Booyens did not hold (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.
Steve Booyens co-founded Pearl Gray Equity and Research in 2020 and has been responsible for institutional equity research and PR ever since. Before founding the firm, Steve spent time working in various finance roles in London and South Africa. He holds an MSc in Investment Banking from Queen Mary – University of London. Furthermore, Steve has passed CFA Levels 1 & 2 and is working toward his Ph.D. in Finance. His articles are published on various reputable web pages such as Seeking Alpha, TipRanks, Yahoo Finance, and Benzinga. Steve’s articles on InvestorPlace form an interesting juxtaposition between mainstream opinion and objective theory. Readers can expect coverage on frequently traded stocks, REITs, fixed-income funds, CEFs, and ETFs.
