Penny Stocks to Watch for October 2018

This all-new Penny Stocks to Watch for October brings a broad mix of companies involved in industries as diverse as mining, financial services, industrial products and online gaming.

A penny stock is generally defined as a stock that has a low share price and small market capitalization. The SEC has further refined the definition to include any stock that trades below $5.

While such stocks are often traded over-the-counter on the Over-The-Counter Bulletin Board (OTCBB) or “pink sheets,” where regulatory requirements are generally lax to non-existent, the picks this month are all traded on major exchanges, primarily on the Nasdaq. (See also: How to Pick Winning Penny Stocks.)

Back in September, major large-cap indexes, including both the S&P 500 and Dow Jones Industrial Average, continued to rise and hit new all-time highs. Meanwhile, small-cap stocks in September did not fare nearly as well, as the Russell 2000 index trended sharply downward throughout most of the month.

For some investors, October carries the specter of the “October Effect,” which is a theory that stocks tend to decline during this particular month. But this theory hasn’t really held true historically other than the handful of major market crashes that did, in fact, occur in October, including Black Monday in 1987.

New Penny Stock Picks for October

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1. Turquoise Hill Resources Ltd. (TRQ)

Yes, trading at only a couple of bucks, TRQ is technically a penny stock. Yet, you might see this humble stock differently when you hear they have $17.3 billion in assets and generated more than $1.22 billion in revenue for fiscal 2017. That top-line value trickled down to a net income of $235.3 million. The Canadian company is primarily involved in mineral exploration and development on the Pacific Rim.

On the chart, support may have formed right around $2.13, the price at which shares are currently trading, which could be based in part on a strong increase in trading volume. Typically, TRQ sees 3.57 million shares trade hands in a single day, but recent activity over the last ten days, as of this writing, is approximately three times greater than that, at 9.07 million.

When trading volume increases like this, it often presages a jump in investor interest and stock visibility. Both of those aspects add strength to the potential support level, and may hint at a price increase over the coming weeks and months.

The chart may also be forming a weak or imperfect double bottom. However, this will be the case ONLY if the shares rise from here – and soon. Otherwise (for example, if they trade sideways or dip below $2.00), then the pattern will have broken down, and lower prices may be in store.

2. Aceto Corporation (ACET)

You have probably heard the expression “blow-off top.” We may be witnessing the exact opposite of that right now, with a “blow-off bottom” in Aceto (ACET) shares. Aceto markets and distributes health, pharmaceutical, and chemical products.

On Wednesday, September 26, shares gapped down slightly, having closed at $2.83 on Tuesday only to open at $2.62. While not the most alarming gap down we've seen, it was on five times greater volume than the typical 244,440 shares traded, which adds significance to the move. This was likely due to investors recognizing the undervalued prices, and thus, bargain hunting.

A forward-looking P/E ratio of 5.71 also suggests these prices will recover in the long term. That may be part of what has encouraged institutional investors to buy up and own 59% of the outstanding shares.

We do expect ACET to bounce back in the short term, too, given that its regular volatility level (with a beta of 1.88) is nearly twice as great as the market average.

3. Avino Silver & Gold Mines Ltd. (ASM)

This stock is at an awkward stage. On the one hand, it is trading on the NYSE at only about 63 cents. That means it may be at risk of facing a few negatives: pretty significant price volatility; a reverse split (also known as share consolidation); and even listing on a lower visibility exchange.

Of course, there is a good side to Avino (otherwise it wouldn't be on this list). First of all, my belief is that precious metal stocks may be among the best-performing types of equities over the next year. And among the metals, silver specifically could outperform gold, platinum, or palladium. Avino operates two silver mines in Mexico with a gold project under development in British Columbia.

There are certain things my team looks for in mining companies: operating in politically and militarily friendly countries; limited 'pre-selling' of proven reserves; a double-digit reserve life index (RLI), which means they have at least 10 years until their mining claims run dry; and a strong logistics network (which means an adequate work force, access to water supplies and machinery, and heavy-load roadways).

Avino must have gotten the memo, because they encapsulate much of what is important about vetting high-quality mining companies. In addition, the recent price gap downward, along with the significantly oversold status, puts the stock squarely on the cusp of a possible recovery bounce from what may be undervalued levels.

4. LendingClub Corporation (LC)

LC brings borrowers and lenders together (peer-to-peer lending), and apparently, does it well. This is evidenced by their operating results and double-digit year-over-year growth (27% in revenue, 31% in loan originations, and 11% adjusted EBITDA).

In fiscal 2017, their top-line results hit $1.18 billion, which is even more impressive considering that same number was only $285 million in 2013. Any company which is seeing (approximately) a quadrupling in revenues over a five-year window may be worth serious consideration.

The next few weeks will be significant from a technical analysis standpoint. If shares trade sideways for that time, we may in fact be setting up an imperfect "cup-and-handle pattern," and if that does in fact materialize, it would imply a nice price pop could be in the offing within the month.

LC is a stock that is driven (from a longer-term perspective) more by fundamentals than technicals. This means you will need to be patient with this one, as they will be growing at the speed of business (which is slow, slow, slow), quarter by quarter. Watch their top line (revenues), and if they can keep them rising at the same speed as they have been, I believe the best days for LC's shares are still ahead of them.

5. AEHR Test Systems (AEHR)

I couldn’t ignore AEHR even if I wanted to. This stock keeps showing up on our radar, no matter the screening parameters or the analysis we apply. The skinny is that they are a global supplier of semiconductor test equipment.

There is little question, in my opinion, that $2.20 may the long-term price floor, and the shares are likely closer to a bottom than a top. This would also represent manageable downside from the current $2.50 share price, if the price starts trying to prove me wrong.

The trading activity is mild and weak at best, which may put any technical analysis review into question. Typically, in more thinly-traded stocks, technical analysis set-ups cannot be trusted, even when they seem to be implying the future price direction. How fast does a Maserati go, if it’s run out of gas?

AEHR is profitable (albeit only slightly), but they are also boasting 56% growth in revenues for fiscal 2018. On a quarterly basis, the growth rate (9%) seems a little more ordinary, although it is still respectable and compelling.

AEHR exceeded analyst expectations (but not mine!) in every single quarter of the 2018 fiscal year, and it is expecting continued growth through the full 2019 period. During that time, CEO Gayn Erickson is looking for a revenue run rate of $35 million, which would be about 18% growth over the $29.6 million achieved in 2018.

6. Zynga Inc. (ZNGA)

ZNGA provides gaming services on mobile platforms and social networks. The company’s 1,555 employees enabled 16% sales growth in 2017, which works out to $861 million in revenue for the period, and $26.6 million in net income.

The health of the company is best displayed by its $554,000 revenue per employee, a very strong 9.5 receivables turnover ratio, and a 69.9% gross profit margin. With 46 cents per share in cash (or $392 million total cash), ZNGA is able to take advantage of any growth opportunities it deems appropriate. Alternatively, it can focus aggressively on R&D efforts.

Insiders hold 8.4% of ZNGA shares, while institutional investors own 77.6% of the outstanding stock.

ZNGA gapped higher in late August, and seems to be more comfortable at this higher trading range between $3.90 and $4.15. I also note that there is "almost" a reliable support level across that $3.90 price point. I say "almost" because 85% of shares are owned by insiders and institutions, which are much less likely to trade the stock frequently. This means any key support level would need to be based on retail investor trading activity, which is not significant enough to ensure the patterns are reliable.

Watch for the MACD to converge throughout the month, as shares may get some breathing room above that $3.90 price point. If that plays out, I believe shares will trend towards $4.20.

And if ZNGA can break above that price with strong momentum, the shares may enjoy a long, sustained uptrend for a few years.

7. AmeriServ Financial, Inc. (ASRV)

A bank holding company, AmeriServ saw its annual revenue hit $59 million in the last year, which translated into $3.3 million in net earnings. This means the company had only moderate single-digit growth of 4.4% year-over-year, but that was still enough to enable share buy-backs and dividend payments.

In a more recent quarterly comparison, top-line growth actually improved by 25.6% quarter over quarter, compared to the second quarter of 2017. The final results were $1,389,000 in net income for the three-month period, or 7 cents per share.

Boasting a P/E ratio of 18.7, and sitting on a mountain of cash ($1.94 per share, $35 million dollars), AmeriServ is incredibly well positioned.

ASRV has insiders holding 10% of the outstanding shares, and institutional investors lay claim to about 39%. Those levels are just about ideal in our books, as management has some skin in the game but not total control. Meanwhile, professional investors are heavily involved with the company, but not so much that they squeeze out the retail investors (that's us).

8. Luna Innovations Incorporated (LUNA)

Luna Innovations develops, manufactures, and distributes optical products for the telecommunications, energy, defense, and medical industries.

With an approximate 30 on the RSI, LUNA is oversold, even after considering the $1 million net positive Money Flow the company witnessed over the last week. Since November 1, 2017, LUNA has seen trading activity dramatically increase, while the shares have more than doubled in price.

It is rare to see any stock double in price and still be oversold. Always take note of unusual situations like this in the markets, because they are telling you something, whether for better or worse. In this case, I believe it implies that the positive momentum will be more likely to continue than to stop.

Net positive Money Flow shows more than $12 million moving into LUNA since mid-March. Thus far it is not showing any signs of reversing or even flat-lining, and in fact it was even growing further as recently as in the last few weeks. After all, any oversold stock is less likely to see negative Money Flow until the RSI normalizes, at least partially.

9. IClick Interactive Asia Group Ltd. (ICLK)

iClick Interactive is a Hong Kong-based company that provides online marketing services primarily in China and other parts of Asia.

The technical analysis set-up on ICLK is what first grabbed our attention. But that's not to say that the fundamentals weren't compelling, too: 54 cents in cash per share; expected P/E ratio for the coming 12 months of 26.3; $177 million in total assets; and significant revenue growth from $65 million in 2015, to $95 million in 2016, to $126 million in 2017.

From a technical analysis perspective, ICLK is heavily oversold, with an RSI reading of 20. Recent Japanese candlestick charting patterns are showing growing uncertainty among investors, with a few spinning tops and loose doji patterns over the last few days. That uncertainty often implies a reversal of the recent trend (which just so happens to be down at the moment).

As shares took yet another step lower on their slide from $8.50, the company saw a net negative Money Flow since September 6 of approximately $2.4 million. Those who want to sell have now had more than enough opportunity, and this is why the RSI dropped to such a bullish level of 20. The next phase, based on the chart patterns plus the gradually leveling-off price decline, is likely to see shares move higher, in my opinion – perhaps by as much as a 20% gain or more in the coming weeks. Some investors may want to protect their downside by selling for a small loss if these shares dip beneath $4.00, as the next stop in such a case may be closer to $3.00.

The Bottom Line

Though many penny stocks and other small-cap stocks took somewhat of a beating in September, the technicals and fundamentals on this broad range of penny stock picks for October are supporting some significant potential upside going into October and beyond. (For additional reading, check out: Penny Stocks to Buy Using Technical Analysis.)

Peter Leeds is the author of several books, including the international bestseller, "Penny Stocks for Dummies." He and his team also issue a popular newsletter devoted exclusively to penny stock picks and analysis.