Don't Waste Your Money on Penny Stocks: These 3 Stocks Are Better Buys
John Bromels, Keith Speights, and Leo Sun, The Motley Fool
Updated
There's something fundamentally appealing about penny stocks: the alluring combination of paying an incredibly low share price for an unbelievably high reward is every investor's dream. Unfortunately, for many penny stocks, that dream never becomes a reality. In fact, penny stocks are dangerous places for your money, even if you're the kind of investor who doesn't mind -- or actually enjoys -- high-risk, speculative investments.
With that in mind, we asked three of our Motley Fool contributors to suggest a stock that they think would appeal to this type of investor. They came back with Charlotte's Web Holdings (OTC: CWBHF), Tellurian (NASDAQ: TELL), and Infinera (NASDAQ: INFN). Here's why they think these stocks should entice investors even more than penny stocks.
A man's hand holds a hammer over a broken piggy bank
For those looking for the best high-risk/high-reward investments, there are better choices than penny stocks. Image source: Getty Images.
A CBD pioneer
Keith Speights (Charlotte's Web Holdings): Some people buy penny stocks thinking they could get rich quick. But as with buying lottery tickets, that only rarely happens. A better route to success is to buy the stock of a leader in a market that's only in its early stages but has a tremendous opportunity for growth. I think that Charlotte's Web meets those criteria.
It pioneered hemp-based cannabidiol (CBD) products several years ago. The company's brand ranks No. 1 in market share. Its hemp CBD products are carried in 8,000 retail stores -- more than double the number at the beginning of this year. This distribution network includes several well-known national chains. For example, Charlotte's Web signed a deal with grocery giant Kroger(NYSE: KR) in July.
Unlike most stocks in the cannabis industry, it is already quite profitable. The company predicts that its revenue will grow faster than its operating expenses, which translates to even bigger profits in the future.
We're in the early innings for the CBD market. The U.S. only fully legalized hemp CBD in December 2018; the Food and Drug Administration hasn't finalized its regulations for hemp CBD products yet.
Estimates vary as to just how big the market will grow, but all signs point to a massive one in the next few years. With a strong brand, a new CEO hired from the consumer packaged goods industry, and an impressive retail distribution network, Charlotte's Web is the kind of stock that just might make long-term investors rich -- or at least richer.
Big gassy dreams
John Bromels(Tellurian): If you're interested in penny stocks, that tells me you have a high tolerance for risk. You probably also don't mind investing in young companies that don't have a lot to show yet for their big plans. In that case, I'd like to call your attention to three-year-old liquefied natural gas (LNG) company Tellurian.
Its management team has decades of experience in the world of natural gas, but Tellurian itself is currently small potatoes, relying on only a handful of wells for its revenue. But the company has big dreams of becoming a major player not just in natural gas production, but in transportation, storage, and export as well. This could all turn out to be a pipe dream (no pun intended). But there are reasons to believe Tellurian might be able to pull it off.
The company is working on a major project right now called Driftwood, which will consist of a major LNG pipeline and export facility on the Gulf Coast. It has pretty much wrapped up the regulatory approval process, and is now trying to secure the more than $27 billion in financing it needs to complete the project. So far, it's secured more than $900 million in total investment from French oil company Total, but there's still a long way to go.
With the regulatory process essentially complete and no new partners announced since Total signed on in early April, the stock has taken a hit. Shares are down more than 50% since April 1. But if any new high-profile partners sign on, the stock is likely to pop immediately. That may be a good incentive for investors to get in now while the gettin's good.
Again, this is a speculative investment, so it's possible investors could lose their shirts if the company has to abandon Driftwood due to lack of interest. But it's no more speculative than the average penny stock. If you can stomach the risk, Tellurian could be the source of a juicy reward.
An oft-overlooked fiber optic play
Leo Sun(Infinera): Infinera's fiber optic systems enable service providers to boost their existing network capacities without laying down additional fiber. It mainly provides long-haul WDM (wave division multiplexing) systems for longer distances, but also sells metro WDM and DCI (data center interconnect) solutions for shorter-range connections.
Infinera's stock plunged about 50% over the past 12 months for three reasons: slower spending from service providers, lower demand for the long-haul systems that generated most of its revenue, and lower-than-expected returns from its acquisition of Coriant last year.
But it now trades at less than one time its projected sales this year. Its annual revenue growth of 47% in the second quarter marked an acceleration from the first quarter, and it expects that momentum to continue with 60% to 70% growth in the second quarter.
Infinera expects its adjusted gross margin, which fell sequentially and annually to 30.7% last quarter, to stabilize and expand to about 32% in the third quarter. That's because its synergies with Coriant, which expands its presence in the faster growing market for short-range systems, are gradually paying off.
It expects orders for its long-haul products to pick up again in the second half of the year, and it's cutting costs by shifting its production to Fabrinet's lower-cost plant. It expects those improvements to reduce its non-GAAP (adjusted) operating expenses and cost of goods sold by about $160 million this year -- a significant sum compared with its projected sales of $1.3 billion.
Infinera isn't profitable right now, but its improving fundamentals indicate that it's much more promising than a penny stock.
John Bromels has no position in any of the stocks mentioned. Keith Speights has no position in any of the stocks mentioned. Leo Sun has no position in any of the stocks mentioned. The Motley Fool recommends Charlotte's Web and Infinera. The Motley Fool has a disclosure policy.
