The healthcare industry can be precarious for stocks of large companies, much less penny stocks. Nevertheless, smaller companies that capture a niche can grow much faster than large-caps. That higher reward potential comes with higher risk.

Small-cap healthcare companies can be nudged out of the market by big competitors, and they can simply become unable to service debt when products and services don’t sell quickly enough. All this makes the stalwarts below more attractive.

None of these are new companies. They have found products and marketing outlets that are sustaining them.

Because of the higher risk, investors should continuously perform due diligence. Watch for product failures, closing markets or excessive competition moving in. To learn more about trading penny stocks, Investopedia Academy has a day trading course online.

Let's look at how our top three picks break down. All figures are current as of August 15, 2017.

1. Curis Inc.

Curis (CRIS) is engaged in biotechnology with a focus on developing drugs that treat cancers. It does significant amounts of research and collaborates with other drug makers in testing and developing drugs. That means it must put drugs through trials and get approvals, which means the stock can fluctuate depending on the outcome for any given drug.

Profits have been less than robust while the company focuses on research. However, management says it is now ready to bring many drugs to market that will produce profits going forward.

The stock began a steady upward march in September 2016, but has since given back all of its gains. It seems to have bounced off of support at around $1.60 per share. Volatility is high, but this is good for investors who want to build a position by buying at support levels. The 50-day moving average is below the 200-day moving average, so cautious investors may want to wait until the 50-day line is back on top before buying into this stock.

Both profits and operating income dropped in the March 31, 2017 earning report. Curis has been increasing its research and development expenditures, which has negatively affected the bottom line.

Investing in this stock must be based on whether investors see promise in the company's drug pipeline. If the company brings its drugs to market soon, the current price could be a bargain.

  • Avg. Volume: 550,668
  • Market Cap: $261.86 million
  • PE Ratio (TTM): -3.71
  • EPS (TTM): -0.49
  • 1y Target Est: 4.75

2. China Pharma Holdings Inc.

China Pharma (CPHI) develops and markets a broad range of products in China, targeting hospitals and retailers. The drugs are focused on cardiovascular applications, brain diseases, and infectious diseases. When the Chinese company reports, it tends to have the majority of its assets as receivables, so investors should consider that many companies do not collect all of their receivables.

CPHI dropped dramatically in May 2017, rebounded, then pulled back again. However, up volume has been stronger than down volume, indicating buyers are showing more enthusiasm than sellers. Investors should note that the 50-day moving average has crossed below the 200-day moving average, which suggests the stock could have more downside. However, these moving averages are trailing indicators, so the stock may settle down and form a new base.

On March 31, 2017, the company reported that it had reduced its losses. Operating income was negative, but had rebounded dramatically from the previous quarter. Yearly revenues decreased by 23.5%. Investors who buy this stock are hoping for the release of effective and popular drugs. As with all penny drug stocks, buyers of this stock must be willing to sit out long periods of volatility while waiting on profitability to return.

It is important to remember that China monitors and controls companies closely, so any investor in this stock is getting exposure to the geopolitical influences that could affect the stock.

  • Avg. Volume: 317,892
  • Market Cap: $7.888 million
  • PE Ratio (TTM): -0.92
  • EPS (TTM): -0.2
  • 1y Target Est: 3.00

3. Repligen Corp.

Antibodies dominate the product line for Repligen Corp. (RGEN). The company sells worldwide and has been in business since 1981. Quarterly revenues have been rising, and operating income is slightly up for the past four quarters.

The stock price broke through resistance at around $34 per share, and has climbed since then. Revenues have been rising for the past four quarters.

Repligen's longevity offers stability. It would be very unlikely that this company would disappear, given its strong product line and marketing effectiveness.

  • Avg. Volume: 352,209
  • Market Cap: $1.55 billion
  • PE Ratio (TTM): 109.79
  • EPS (TTM): 0.38
  • 1y Target Est: 46.80

The Bottom Line

Penny health care stocks are high-risk. Trials of drugs can produce negative results, and the market may not readily accept a new drug. On the other hand, a successful drug can cause a penny stock to soar and give investors profits they would not expect from more-expensive stocks. (See also: Understanding Penny Stocks' Risks and Rewards.)

It is wise to limit the percentage of your portfolio you keep in penny healthcare stocks. These are speculative plays.

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