As the year draws to an end, I'm finding myself thinking more and more about the French expression "plus ça change, plus c'est la même chose," or, in English, "the more things change, the more they stay the same."
The U.S.-China trade war, Brexit, and the economic slowdown were all supposed to completely transform the financial landscape in 2019. But I'm still seeing the same irrational investor exuberance governing the global stock markets, even as corporations warn of the adverse impacts to profit they've experienced over the past several quarters.
This is, in my opinion, symptomatic of what I like to call a "drip torture" market, in which shareholders are fooled into thinking the economy is doing well when in fact it's suffering. So mesmerized are these shareholders by the tiny gains they're making, in other words, that they can't see the bigger picture of a looming recession.
If you're reading this article, however, then you're already far more knowledgeable than the vast majority of investors right now … and therefore less likely to have a probable global economic slowdown sneak up on you.
While some of the penny stocks I discuss below may take a while to get going the way I expect, I believe that their fundamentals may very well prove strong enough to carry them through a recession safely – and even, perhaps, ultimately allow them to flourish because of these tough circumstances.
The following list comprises updates on Penny Stocks to Watch from over the past year, as well as several new ones for you to keep your eyes on.
Due to the time constraints inherent to technical analysis, some of the patterns, signals, and set-ups I describe below may no longer be relevant or intact as of the time you read this article. Please ensure you conduct your due diligence when looking at the trading charts and data for the following stocks.
Many of the stocks mentioned here were also profiled, traded, or otherwise discussed in the Peter Leeds Newsletter. Peter may furthermore own shares in some of the investments mentioned, in which case that fact will be clearly indicated. (See below for an additional disclaimer regarding penny stocks.)
O2Micro International Limited (OIIM)
I don't necessarily expect the stock picks I include in my "Penny Stocks to Watch" columns to take off immediately after I write about them – I typically write with a longer-term horizon in mind. But O2Micro International Limited (OIIM) did just that after I featured it in my November article, gaining an incredible 30% over the past month.
What was behind this rise? Nothing less than a great set of third quarter earnings from O2Micro, with revenue up around 12% on a sequential quarterly basis. Overall, the company is looking in much better shape than when I discussed it last month – and investors are beginning to notice. Even at its much higher price of $1.68 (as of the time I was writing this report) and despite the fact that prices have been taking a breather, I'm still seeing a lot of upside ahead for O2Micro.
Recall that I commented last month on the stock, "The corporations that enjoy the best growth in the coming few years will probably have significant exposure to, and operations within, Southeast Asia. That makes O2Micro a troubled corporation with very respectable mid- and long-term upside potential." I'm standing by this opinion strongly and can't wait to see where O2Micro stock goes next.
Rekor Systems, Inc. (REKR)
One of the most exciting penny stocks I've been following this past year has got to be Rekor Systems, Inc. (REKR), which was up an astonishing 258% year-to-date as of the time I was writing this article. By the way – that's after the stock plummeted from its 52-week high of $5.44 to its current level of $2.38. Suffice it to say that Rekor Systems investors have been on quite the roller coaster ride over 2019.
(Psst – subscribers to my newsletter who invested in Rekor Systems would have made a 688% profit on the trade if they sold it at its peak.)
Despite its precipitous fall since July this year, I believe that Rekor Systems stock will likely climb back to its erstwhile highs, although this may require some patience on shareholders' part. After all, while the company's balance sheet is looking somewhat shaky, its industry-leading technologies and near-30% five-year revenue growth average speak for themselves – notwithstanding some blips in Rekor Systems' sales performance in the short term.
Aegon N.V. (AEG)
Dutch life insurance firm Aegon N.V. (AEG) was one of my Penny Stocks to Watch for October, and it's already up 19% over the past quarter despite some prominent rating downgrades from financial analysts. There's still a lot to like about Aegon, including a P/E ratio of 10.92 and forward P/E ratio of 5.67, a superlative PEG ratio of 0.28, and revenue growth of 209% in the most recent quarter. Oh, and a 7.30% dividend.
Even at its relatively higher price of $4.45 (as of the time I was writing this article), Aegon is looking like a good deal to me. I wouldn't be at all surprised to see it leaving penny stock territory behind and transcending the $5 level at some point over the next year.
Penny stocks are notoriously volatile.
Polar Power, Inc. (POLA)
I look at a lot of penny stocks over the course of a given day. What really gets me excited is low-priced equities that may be more immune to peaks and troughs in investor sentiment. Enter the utilities sector. Polar Power, Inc. (POLA) isn't one of the classic utilities, insofar as it doesn't run a local monopoly on the electrical services it provides. But even so, unlike steak dinners or luxury handbags, the demand for direct current power systems (and other utilities, including water and other energy sources) is unlikely to drop during times of economic uncertainty.
These services can therefore be perceived as something of a "safe bet" when investors are getting nervous about recession. With a remarkable near-halving of its value over 2019, Polar Power has missed out on the gains seen by the utilities sector so far. That's almost certainly because of one major red flag: it hasn't been profitable since 2016, turning in small-ish (under $1 million) losses over the 2017 and 2018 period. (After all, if Polar Power didn't have some sizeable black marks on its record, it probably wouldn't still be a penny stock, right?)
I believe that the market is overlooking Polar Power's generally very strong comeback story. Over the past five quarters, its revenue has typically climbed substantially, with the firm claiming sales of $5.82 million as of June 30, 2018. Over the most recent quarters, these have climbed to $8.3 million, $7.75 million, and $9.24 million. In its second-to-last quarter, Polar Power delivered an earnings surprise of 500% – not too bad for a stock that only costs $2.45.
Notably, the stock has underperformed my expectations since I selected it for my newsletter's Hot List. This is because its most recent results missed consensus estimates by -100%. Disappointing, to be sure – but the reaction seems overdone to me. It’s obvious that, as Polar management described in the most recent conference call, the company's actually hitting it out of the ballpark in terms of its sales these days … even if it "only" recorded break-even earnings in the most recent quarter. For example, Polar Power's sales backlog at the end of the second quarter of 2019 was $7.62 million, compared to $5.83 million last year.
Finally, with a robust balance sheet that includes quick and current ratios of 3.40 and 8.20, respectively, Polar Power appears to be in a strong financial position. This may hold it in good stead even if its march toward profitability takes longer than I've expected.
Limelight Networks, Inc. (LLNW)
With Apple TV+ having dropped on Nov. 1 and Disney+ making its debut on Nov. 12, last month may go down in history as the definitive moment when online streaming entertainment cemented its stranglehold on our attention spans. Limelight Networks, Inc. (LLNW) is convinced that its Content Delivery Network (CDN), one of the world's largest, can enable companies to provide their viewers with the highest-quality entertainment experience – no rebuffering or video quality issues allowed.
If the company's impressive roster of customers, past and present, is any indication of Limelight's technological prowess, then consider me at least semi-convinced. Microsoft, HBO, Amazon Prime Video, Disney, Apple, Marvel (as in Spider Man, Iron Man, and all those other fun men), and the BBC are all former or current clients.
Equally interesting, at the company's Analyst Day, management announced: "Limelight is rapidly preparing for the next evolution in cloud storage technology to handle online streaming growth. The immediate opportunity is significant, with edge cloud accounting for $7.7 billion in 2018 and increasing to $16.6 billion in 2022."
The company's strategic decision about a year ago to shift its focus to high-quality edge cloud computing led to some substantial net income losses and, subsequently, tough times for the stock. Limelight is still very much on the mend, as its steep net income losses over the past five quarters will testify. Limelight's executive team believes that the strategy is finally starting to pay off, however.
And the company's most recent set of results would seem to back up this argument. For instance, its third quarter revenue for 2019 was the second highest in Limelight’s history, and its edge computing-related services revenue rose 60%. Meanwhile, quarterly traffic reached a new record high – not just from a handful of customers, but from a broad and geographically dispersed group of its top 20 clients.
A few other nice numbers that grabbed our attention: earnings per share next year are projected to climb 500%. The debt-to-equity ratio is zero. Adjusted EBITDA is $5.8 million. With a great economic storm brewing, I believe that technology stocks like Limelight Networks should remain relatively strong even during the deepest downturns.
After all, recessions keep people at home – and home is where Limelight brings you the best of the streaming internet. It may take a while to get there, and Limelight undeniably still has a lot of work to do. But in my opinion, Limelight Networks stock may be able to leave its penny-stock status behind over the next 18 months or so.
Castlight Health, Inc. (CSLT)
Castlight Health, Inc. (CSLT) provides application software to American companies that allows their employees to navigate their health benefits plans more easily. Although the company recorded, on average, very impressive revenue growth of 65% over the past five years, Castlight Health stock has performed execrably over 2019, halving in value over that time.
That massive drop in value arose pretty much entirely on the back of Castlight Health's second quarter results this year, when the company revealed that it had lost some old customers and failed to secure new ones. Guidance was lowered significantly. Investors were unhappy – and justifiably so. Since then, however, Castlight has secured itself a new CEO, Maeve O’Meara, and is focusing on partnering with health plans rather than targeting companies directly.
This strategy is most clearly manifested in its newly expanded agreement with life insurer Anthem, Inc. (ANTM), which has (according to the most recent conference call) "a total contract value of almost $170 million over the 30-month term [and] provides increased revenue stability and visibility through mid-2022."
I don't know whether Castlight Health's turnaround strategy will pay off. So far, the market itself hasn't seemed particularly convinced, with shares trading sideways for quite a while now. Still, I think the current price of $1.40 undervalues the stock given the model being put in place by the Anthem partnership, which will hopefully show insurers that they can reduce costs by teaming up with Castlight Health, as well as that good revenue track record and a 60% gross margin.
Nonetheless, because of the large net income losses and most recent decline in revenue growth, I'm keeping my estimates cautious on this one. But even if the stock were to jump to $2 on the back of, say, a new client win, that would represent more than 40% upside from the current price of $1.40.
Interested parties may wish to keep a tight stop-loss here in case my expectations and assumptions turn out to be incorrect. High risk aside, however, I'm currently finding Castlight Health to be an extremely interesting proposition.
Putting It All Together
When I'm going through all the hundreds upon hundreds of penny stocks that cross my desk every day, perhaps the single most important component of my financial analysis style will center on investor psychology. (I'm even writing a book on the topic! Stay tuned.)
Right now, it's looking increasingly clear to me that fear may soon be governing the stock markets as the full impact of the recession hits home with most shareholders. Luckily, as an Investopedia reader, you're already way ahead of the game. As I talk about on the Peter Leeds YouTube channel, knowledge is power – and you and I are going to need a lot of both when the going gets tough.
Peter Leeds is the author of several books, including the international bestseller, "Penny Stocks for Dummies." He and his team also issue a newsletter devoted exclusively to penny stock picks and analysis, as well as a popular YouTube channel — PeterLeedsPennyStock.
Penny stocks are volatile and can generate catastrophic losses. Price levels in this article are hypothetical and do not represent buy recommendations or investment advice. Keep in mind that it's your responsibility to make trading decisions through your own skilled analysis and risk management.