Insider Monkey

10 Hot Penny Stocks To Buy

Fahad Saleem
9 min read

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In this article we take a look at some of the hot penny stocks that are gaining value. To see more such stocks click 5 Hot Penny Stocks To Buy.

Investing in small-cap and micro-cap companies comes with a lot of volatility, surprises and risks. When broader markets are in turmoil, like they are ever since the inflation crisis started to hammer the global markets and the Federal Reserve started to raise rates, investing in small companies and penny stocks becomes even more risky as investors flock to stable, large-cap plays. But when markets begin to rebound small companies tend to perform better. For example, after the latest jobs report showed that the US labor market remains hot, the Russell 2000 index of small-cap stocks jumped 3.2%, surpassing the S&P 500 gains of 1.5%. This is because when indicators point to robustness of the US economy, investors flock to small-cap stocks which are often focused on the domestic US market.

Small-cap stocks have been showing an upbeat trend since earlier this year when markets rebounded on hopes that the Federal Reserve will start hitting brakes on its interest rate hikes. According to a report from the WSJ, data from Refinitiv Lipper showed that investors poured a whopping $4.2 billion in U.S. mutual and exchange-traded funds that buy small-cap stocks in 2023 through February 22. Data also showed that investors pulled $17.4 billion from large-cap funds in the same period. Small-cap stocks were the second most-attractive investment option of investors this year after international stocks, which attracted $16 billion in the same period.

Compare this outperformance to the bloodbath seen in small-cap stocks last year and you start to understand the investor appetite for risky stocks amid resilient economic growth. Small-cap stocks significantly underperformed the S&P 500 in 2022 as funds investing in small-cap plays saw outflows of a whopping $28.5 billion, according the WSJ. The Journal quoted Rayna Lesser Hannaway, a portfolio manager at Polen Capital, who said that the market has been anticipating a recession for quite some time now and she “hopes” that companies’ management teams are taking smart decisions today to weather economic storms of tomorrow.

Hannaway co-manages the The Polen US Small Company Growth fund, which is up about 10% year to date as of June 3.

Another reason why investors are preferring small-cap stocks is their attractive valuations. The WSJ report quoted Jim Masturzo, chief investment officer of multiasset strategies at Research Affiliates, who said that his firm is expecting the Russell 2000 index to return about 5% a year over the next 10 years. This would be more than double the 1.9% return he expects to see from the S&P 500.

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