Make no mistake: in my opinion, the month of May in 2019 will mark the beginning of an intense transition period for many investors. Fortunes will be made and lost over the next year or so as the economy shifts from wild-eyed (and mostly totally irrational) optimism to a severe correction and as inflated stock prices come up against a nearly bullet-proof resistance zone.
Last month, I explained how both the Dow Jones Industrial Average (DJIA) and the Russell 2000 Index—an excellent diagnostic gauge for the performance of many of America's smaller corporations—were pointing to slowing economic momentum, with an ever-greater number of investors finding themselves at risk as complacency continued to build.
Following the recent release of strong first-quarter gross domestic product (GDP) data at 3.2% coupled with better-than-expected earnings from the U.S. tech barons, the last few days of April have seen stocks soar to near record highs. However, as I've discussed in my YouTube videos and the Peter Leeds newsletter, all of this is looking very much like the proverbial calm before the storm to me.
While penny stocks are often subject to the worst volatility in times of great economic change, I'm paying close attention to the low-priced equities that I believe will profit in spite of—and even because of—a market correction.
This means that investors of all stripes—from the rankest novice to the savviest and most experienced—could have the rare opportunity to make it or break it in the months ahead. I'm seeing a lot of opportunities at the moment, but an appropriate amount of caution, matched with a sense of openness and attention, will be mandatory to survive in the economic environment to come.
Penny Stocks to Watch
Disclosure: 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 important disclaimer regarding penny stocks.>
Maxar Technologies Inc. (MAXR)
Are you feeling strong, my friend? Maxar Technologies Inc. (MAXR) stock is super-speculative, appropriate only for the most risk-tolerant among us. Although it is technically not a penny stock anymore (trading now at $5.02), in our defense, it did have that designation when we were putting this analysis together.
The last three days on the candlestick chart shows a three white soldiers pattern, which has very bullish (positive) implications for the stock's price going forward. As well, the $5.00 resistance level may have (just Monday) flipped, and now it might be a long-term support level. If that theory proves out, you may not see shares of Maxar Technologies trading for less than $5.00 for a very long time.
Engaged in all things to do with satellite communications technologies, Maxar Technologies is on the cutting edge of an industry that may have about 99% of its growth ahead of it. However, as would be true of any company operating in this type of space, before even looking into the financials, you might assume that it is just bleeding cash. So, prepare yourself, and let's take a look.
It is always nice to be pleasantly surprised. In fiscal 2017, Maxar Technologies brought in $130 million in profit. In fact, the most recent five years all showed earnings, although the company did lose money over the two most recent quarters. A $486 million unusual expense did not help the books, of course, and as you would expect, the majority of the operational loss was caused by that non-recurring hit to the company's financial position.
Maxar Technologies has $8 billion in assets but also faces nearly $6 billion in liabilities. The one thing that $6 billion in debts does, at least, is make me feel "not as bad" when I see the amounts on my own credit card bills!
Hi-Crush Partners LP (HCLP)
I absolutely love Hi-Crush Partners LP (HCLP) as a long-term investment. The company provides sand as a service, and its main "often over-looked commodity" has tremendous value and use for the oil fracking industry.
In the company's own words, "Hi-Crush Partners LP is a strategic provider of proppant and logistics solutions to the North American petroleum industry. We own and operate multiple frac sand mining facilities and in-basin terminals, and provide mine-to-well site logistics services that optimize proppant supply to customers in all major basins." Essentially, fracking requires an excessive amount of sand, and the petroleum industry is made more efficient and more profitable by the use of Hi-Crush Partners' very specific, industry-leading sand mining and delivery services.
Shares of Hi-Crush Partners have been falling from $16.65 eight months ago and are now showing signs of bottoming out near $3.50 to $4.00. Yet, the financial trends are suggesting that this company will continue to hold a very special place in the eyes of most oil well companies.
In 2016, top-line revenues came in at $204 million. In 2017, that same metric leaped up to $602 million, which brings us to $843 million in 2018. In fact, 2018 also had a net profit of $141 million, enough to buy a pretty cool sandbox for the kids of the CEO!
Looking at the quarterly results, the company typically produces encouraging profits. Last quarter, Hi-Crush Partners did have a rare loss of just under $10 million over the period. However, this is not at all a concern given the big picture, especially once you look at the balance sheet, which shows $1.43 billion in assets covering $626 million in liabilities.
Ceragon Networks Ltd. (CRNT)
Ceragon Networks Ltd. (CRNT) renders transmission capacity to mobile and fixed-line carriers and private network operators. The company engages in the provision of wireless backhaul solutions. Its products include radio units, management systems, small cell hauling, packet, and hybrid microwave, and long-haul solutions.
Besides being a compelling company for long-term investment, these shares have become quite interesting over the past six trading days. A significant spike from about $3.80 to $4.25 was followed by five straight days of "fade" in which the shares gave up a little more of that rise each day.
This situation has brought Ceragon Networks stock in line with what I feel is a great value range, backstopped by what is not yet (but will almost certainly become) a support level near $4.00. In addition, the fifth straight day of decline for the shares has been washing out any "weak hands," which clears the way for a resumption of the uptrend. The fundamentals strongly support my opinions on the stock, with net earnings of $23 million in fiscal 2018, $11.6 million of which came in the fourth quarter alone. Total assets of $283 million easily cover total liabilities of $123 million.
Fuel Tech, Inc. (FTEK)
Yes, shares of Fuel Tech, Inc. (FTEK) have spiked well from $1.20 a few months ago to their current levels closer to $2.70. Especially when it comes to penny stocks, such strong upward momentum typically means one of two things: either the investment had a sudden (often unjustified, unsustainable and temporary) price pop ... OR ... the shares have entered a new trading range based on significant operational successes.
If I believed that we were dealing with option A, Fuel Tech stock wouldn't even be discussed here right now. Take a look at the sudden and lasting trading volume explosion from March 15, which is another indicator that these shares have "woken up" and that the company valuation may have been permanently reset by investors.
I expect that the new (and absolutely justified) trading range will be between $2.25 and $2.90 for the foreseeable future until this stock resumes its uptrend to even higher prices.
CVR Partners, LP (UAN)
You rarely will find a penny stock that pays a dividend as high as CVR Partners, LP (UAN), which currently pays nearly 8%. The high dividend payment, especially with low-priced stocks, should typically first and foremost be considered a warning sign.
However, depending on the phase of the business lifecycle (proof-of-concept, growth, maturity, decline…), as well as the actual industry in which the company operates, there are very rare circumstances when it can be appropriate for smaller companies to pay hefty quarterly dividends.
In this case, considering the nitrogen fertilizer business in which the company is engaged, CVR Partners may be making the best use of its funds. The company is closer to being like a utility or commodity resource, and I wouldn't expect to see much massive growth. Consistent sales, consistent dividends and consistent operational results ... boring, boring, boring.
Boring…? That is actually a great thing. Some of our best performers have included many of the most boring businesses: casket makers, funeral homes and rendering plants (which turn ponies into glue). The very fact that the business is NOT digital currency, marijuana sales, biotech or electric vehicles usually means that investors won't be overpaying for shares.
The $629 million in liabilities should startle you, as should the recent ongoing losses ($6 million in the last quarter) until you see the "B" after the company's asset position. CVR Partners has total assets of $1.25 billion, which makes its higher debt levels ($629 million) slightly more palatable.
MiMedx Group, Inc. (MDXG)
I do not like Dark Market stocks. That includes over-the-counter (OTC) stocks like MiMedx Group, Inc. (MDXG), pink sheets, OTC-QX and OTC-QB. (Important: My concerns do not apply to OTC-Bulletin Board stocks – OTC-BB.) Keeping far away from Dark Market stocks should be your number one rule when thinking about penny stocks.
Fully 95% of Dark Market stocks do not pass a Leeds Analysis review, and the vast majority of investors in Dark Market stocks lose money. I could go on for hours about the reasons for my concerns (and in fact, I have, in numerous articles, media interviews, and YouTube videos), and maybe I would add to that in a different venue, but I'll leave it alone for now.
My concerns should add weight to the fact that I overlooked them in this instance because the stock price has fallen into what I consider to be heavily undervalued territory. What you would typically expect from any Dark Market stock, or in fact just about any biotech company, would be massive, ongoing losses. Strangely, the reality is not so for MiMedx.
However, I'll need to break this next part down into the good and the bad. What I mean specifically is that, since MiMedx is a Dark Market stock, its most recently reported financials are from quite some time ago – fiscal 2016 – but the results back then did indeed come in very strongly. Yes, MiMedx is delinquent in filing operating information to shareholders, but after all, it is a Dark Market stock, which means that the company will eventually get around to reporting to you, the shareholder, whenever it feels like it, IF it feels like it.
Penny stocks are notoriously volatile.
In 2016, MiMedx reported a profit of $12 million, after $29.5 million the year prior. The balance sheet in 2016 was solid, with $193 million in assets covering $60 million in liabilities.
One concern to keep in mind is that sometimes after good results, a Dark Market stock may go dark—without reporting again for a long time. This is kind of like "leaving on a high note," George Costanza style. Many times, this may involve the fact that the numbers may have gotten much worse, so the company takes its time admitting that fact.
So, have the results for MiMedx taken a dive? Who knows? After all, it is a Dark Market stock, and it doesn't have to tell you.
For those of you who might ignore my numerous warnings, if you're going to trade OTC shares anyway, then maybe MiMedx will work for you. After falling nearly every day since trading above $4.00 on April 9 (which also showed a shooting star candlestick trend-reversal pattern, indicating that prices will fall), the shares have only begun displaying an ending of their downtrend, which may lead to a price reversal back to higher levels.
Inseego Corp. (INSG)
I really like Inseego Corp. (INSG), which I suppose I could say about every company we discuss on this blog. Inseego provides solutions using 5G technology that connect workers, fleets of vehicles and devices through the Internet of Things (IoT).
As this company continues to build out its business, shares entered a new, higher trading range, moving from the heavily undervalued $2-ish level to consolidate above $3.25. Good results enabled Inseego shares to ratchet up yet again after that, to settle and hold above $4.50 ... but they still may not be done yet! Within months, I would expect $5.25 to become the new floor in prices.
Inseego was able to achieve $16.6 million in operating income last quarter, and that profitability speaks volumes in such a competitive, cost-heavy industry. However, if you think about Inseego stock as a long-term investment, you are going to want to watch its balance sheet closely. (Right now, the company is underwater, with $192 million in total liabilities versus $158 million in total assets.) The company will need to cut costs, maintain revenues and bring its assets/liabilities back in line in a sustainable way. Once Inseego achieves that, the sky is the limit.
Novume Solutions, Inc. (NVMM)
Novume Solutions, Inc. (NVMM) provides various solutions, from placing highly skilled engineering professionals with top firms and government agencies to technology solutions involving public safety and crisis and risk management. Thus, it is a specialized consultancy, with a somewhat short track record of very impressive growth.
Assets ($18 million) comfortably cover liabilities ($9.6 million). Besides demonstrating financial strength, you can also see that Novume Solutions is pretty (relatively) small when compared with most companies. However, shares are trading at about 70 cents, and Novume Solutions is quite impressive when compared to just about any other 70-cent stock.
In the most recent quarter, the company achieved $11.8 million in revenues. On an annual basis, the total top-line result in 2018 was $48.6 million (up from $22 million in fiscal 2017). I anticipate the current growth rate to continue, which should translate into sustainable increases in Novume Solutions' share price.
The Bottom Line
In the past, I've been accused of being too pessimistic about the overblown state of the market right now. Far from it: I'm actually a huge optimist, and I believe fervently that this month, and the upcoming year or so, will present some truly unique and exciting opportunities for investors who have been paying close attention.
If you're still reading this article, that means you. I'll see you next month with updates on the stocks we're looking at and more observations on the markets. In the meantime, now more than ever this is the time to do your research and to follow your head and gut.
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.
Important Disclaimer: 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.