As the markets close in on new all-time highs, the debate about the health of the overall economy continues to grow. Few worldwide can overlook the global slowdown, nor are we able to ignore the rising impacts of economic contraction on the businesses operating here in America.
In fact, just about every corporation has mentioned at least one of these negative factors on its recent conference call: trade war; economic contraction; lay-offs; overseas recessions; and uncertainty surrounding Brexit. You would be hard pressed to find more than a few companies that are as optimistic about the economy as they were a few years ago.
This makes the very early stages of our analysis – specifically the types of shares we would expect to perform well – somewhat different and more involved. Considerations such as cost reductions and plentiful cash-on-hand trump expansion plans, research and development, and hiring new workers.
Given the weakening and uncertain state of the economy, the following penny stocks are investments we anticipate will thrive through the coming days better than most. In fact, some of these businesses may perform very well due to (and because of) the very probable recession.
Many of the stocks mentioned below were also profiled, traded, or otherwise discussed in the Peter Leeds Newsletter. As well, Peter may 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.)
Pareteum Corporation (TEUM)
This one is troubled and hyper-risky – advanced investors only please. One of the most profitable times to buy anything is when sellers are capitulating. The mobs are dumping shares with reckless abandon, shareholders can't get far enough away from the stock, and babies are being thrown out with the bath water.
Capitulation has many moving parts. The most obvious among them is the dramatic spike in trading volume as the shares crumble, and that has absolutely been the case with Pareteum Corporation (TEUM) over the past few days.
Average buying and selling activity has gone from about 2.5 million shares traded per day to anywhere from 34 million to 11 million in each of the past four days (as of the time of this analysis). The fact that trading volume has ballooned in conjunction with a significant share price decline (from $5.93 a few months ago to where it is now at 43 cents) while Pareteum stock is displaying the first signs of having "found bottom" all implies that this is almost certainly a capitulation point.
The fact that shares gapped down after a very significant nose-dive adds weight to my capitulation theory. As well, the very rare "tweezer bottom" signal being given by the Japanese candlestick chart typically precedes a strong move higher in the coming weeks and months.
Pareteum stock has plenty of issues bringing the stock price down, including a few class-action lawsuits. However, at this (capitulation) point, anyone who would have wanted to sell their shares has now done so by now. Almost all bad news has been factored in to Pareteum shares by now.
Pareteum is only appropriate (in my opinion) for very risk-tolerant, experienced investors looking for a short-term trade. After capitulation, we will often see a strong price-recovery, and I believe Pareteum will be no exception to that scenario.
Grupo Supervielle S.A. (SUPV)
Along with almost every other stock based in Argentina, Grupo Supervielle S.A. (SUPV) cut about in half on Aug. 11. In fact, the entire overall market declined alarmingly, in what was nearly the largest single-day market decline ever, anywhere.
The negative uncertainties mainly surrounded the Argentine election, which is likely indicating that market-friendly Mauricio Macri will be replaced by Albert Fernandez. The election is being held literally today, as I write this analysis.
Argentines are angry over the country's struggling economy and the austerity measures put in place under Macri. If any candidate (and it will almost certainly be Fernandez) gains 45% of the vote, then that candidate will be declared president. Otherwise, there would need to be a run-off election on Nov. 24.
Regardless of who wins, and the reason why we are discussing Supervielle, is that the Argentine stock market has already begun to recover from the significant downside over-reaction. If Macri somehow pulls a rabbit out of the hat and gets the electoral victory, just about every stock on the markets there will lurch higher.
If Fernandez wins, it may also be a positive for the markets. The very negative reaction to the realization that Macri will probably lose has now been fully factored in. Moving forward, an upward recovery from the sell-off will be more likely than any further downside from here.
As well, as the uncertainty of the entire election is being resolved, it may allow shares to begin their long road to recovery. Stock markets get hurt by uncertainty more than actual bad news, and in Argentina, that law of investing holds just as true as anywhere else.
TAT Technologies Ltd. (TATT)
Having dipped just below $5 per share in the last few weeks, TAT Technologies Ltd. (TATT) is technically only recently considered to be an official penny stock. Shares in this company were as high as $12.50 a few years back, and since then, there has only been decline.
This is an example of a business we believe is in the perfect industry at the perfect time – the company provides services and products for the military and aerospace markets. Given that global and domestic tensions have been flaring up, as well as the advancements in numerous technologies used by TAT Technologies, there are many more opportunities for corporate growth than there are risks.
These are some very thinly traded shares, even at these new lower prices, with typical daily trading volumes of just over 1,000. While we are sometimes concerned about low-activity shares, we believe that investors who consider using limit orders (rather than market orders) will be able to avoid overpaying for what we believe to be heavily undervalued shares, or causing the price to move just through their own buying or selling.
TAT Technologies boasts a strong financial position (with $113 million in assets, compared to only $28 million in liabilities). The company typically brings in about $95 million in top-line revenues in any given year, and based on its quarterly results trends, TAT Technologies has been doing an excellent job of returning to profitability after a spell of losses.
Penny stocks are notoriously volatile.
Endologic, Inc. (ELGX)
Endologic, Inc. (ELGX) develops and manufactures minimally invasive treatments for aortic disorders (stents and other specialty devices). All things medical are much more likely to hold up well during any kind of economic tremors or recessions, since people typically prioritize health over finances.
After shares declined in price for several months leading up to this point, Endologic stock has been showing signs of bottoming out in the range of $3.25 to $3.60. As of the time of this analysis, Endologic was trading at $3.59.
It is too soon to tell if Endologic shares will hit a floor at these levels, but if they do, the upside will be significant. The range-bound trading (between $3.30 to $3.80) over the past month is demonstrating a turnover in shareholders (old ones leaving, being replaced by new ones), as well as a slowing of the downward price trend.
However, investors do need to be aware of the massive $25 million losses the company faces in most of its quarterly periods. While that may sound alarming, it becomes much less so when you consider Endologic's $324 million asset position.
O2Micro International Limited (OIIM)
O2Micro International Limited (OIIM) has made a name for itself in high-performance integrated circuits and solutions. Granted, many of the company's products are parts used in computers, automobiles, and consumer electronics, all of which may get hit by the recession.
However, O2Micro's operations in the rapidly growing regions of China, Malaysia, Japan, Korea, and Singapore bode well for massive market growth potential. Its corporate operations need to be considered with the backdrop of the trade war, but most of the risks stemming from that seem to have been factored in.
The end result? O2Micro could enjoy significant share price increases over the long term, now that the most obvious of concerns have pulled these valuable shares down. I believe that current prices are at unrealistically low valuations. If any of these macroeconomic concerns ever get better, such as a full-and-final end to the trade war, O2Micro stcok would see even more upside.
The corporations that enjoy the best growth in the coming few years will probably have significant exposure to, and operations within, South East Asia. That makes O2Micro a troubled corporation with very respectable mid- and long-term upside potential.
Rayonier Advanced Materials Inc. (RYAM)
Rayonier Advanced Materials Inc. (RYAM) engages in the production and sale of cellulose specialties. Its products include high-purity cellulose, lumber, paper and pulp, and paperboard.
Boring? Maybe a little, but companies that bore investors (like casket makers, rendering plants, and funeral homes) often tend to perform very well as most people overlook them.
Last fiscal year, Rayonier Advanced Materials reported $128 million in profits (on $2.1 billion in top-line sales). Not so boring now, is it? In the prior fiscal year, Rayonier Advanced Materials enjoyed earnings of $324 million.
The company sits on $2.68 billion in assets, over its $1.97 billion in liabilities. Thus, despite some scary and massive numbers, Rayonier Advanced Materials is in fine financial shape. Its industry (technically, it's chemicals) and sector (basic materials) will likely hold up well during any kind of recession, although if the tough times get bad enough to pull ALL industry groups down, that could act as a drag on sales for Rayonier Advanced Materials.
Putting It All Together
Will penny stocks be a good way to thrive through the potentially hard times to come? Most will do poorly, but some will perform very well. Considering the companies themselves, their operations, and potential market expansion (all on the backdrop of a business cycle rolling over from growth to contraction), the investments mentioned above are some of the ones we expect to win.
By "win," we mean that they will likely continue to grow even as most shares around them soften up. In our view, these companies will enjoy resilience in the prices of their stock, and they will help insulate you from the hits we anticipate the overall markets to suffer.
You can learn more about how to thrive in any economy on the Peter Leeds YouTube channel, or here on Investopedia with their relevant insights. Even the fact that you are here reading this content demonstrates that you are an intelligent and awake individual, and thus will be more likely to come out of any scenario in great shape.
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.