It can be tempting to think that buying low-priced penny stocks is the best road to riches, but far too often, penny stocks lead to the poorhouse. Rather than risking your hard-earned money on penny stocks, it could be better to buy more established companies with catalysts that could propel shares higher. For example, AerCap Holdings N.V. (AER +0.18%), Wheaton Precious Metals (NYSE: WPM), and Northwest Pipe Company (NWPX +0.56%) could be profit-friendly alternatives to penny stocks, according to three of our Motley Fool investors.
IMAGE SOURCE: GETTY IMAGES.
A bargain-bin buy
Jordan Wathen: (AerCap Holdings N.V.) It isn't a penny stock, but relative to its earnings power, AerCap is certifiably cheap. Shares currently trade for less than 10 times its earnings outlook for 2018, making it a rare bargain in a sea of high-priced stocks.
AerCap Holdings is an aircraft lessor that makes money buying and leasing aircraft to airlines on long-term leases. Large passenger jets cost as much as $270 million, so airlines often turn to aircraft lessors to avoid the upfront cost of buying new planes.
In effect, AerCap acts as a "bank" of sorts, helping airlines finance their most expensive assets. Under capable management, the business can be extraordinarily profitable, as leases generate predictable cash flow with the opportunity to realize gains on the sale of planes late in their useful lives.
Insiders have far more to gain by allocating capital for the benefit of shareholders than by growing the business at all costs. AerCap's CEO, Aengus Kelly, owns more than 2.2 million shares of stock worth approximately $117 million. Last year, the company's C-level executives earned just $8.3 million combined.
It's rare that you get the opportunity to buy a company at a single-digit multiple of earnings led by a management team that stands to make more from stock appreciation than collecting a paycheck. That's why I think AerCap is a compelling value stock for investors on the hunt for bargains.
A lustrous company worth choosing over any penny stock
Sean Williams (Wheaton Precious Metals): Sure, the sometimes randomized gains in penny stocks can be alluring, but you'll be in much better shape if you think big and consider an industry powerhouse like Wheaton Precious Metals. With a $10 billion valuation, Wheaton is just about as far as you can get away from the penny-stock mania in the gold and silver industries. But it also holds a handful of key advantages over its peers that make it arguably the top company to own among precious-metal stocks.
To begin with, Wheaton isn't your traditional gold and silver producer. It doesn't dig and mill precious metals out of the ground. Instead, it's a royalty company that provides large sums of cash to developed and junior miners that are looking to expand an existing mine, or develop a brand-new mine.
In exchange for providing this funding, Wheaton is granted a long-term, perhaps even life-of-mine, stake in the production at the mine in question. Wheaton also often pays the producer a well-below-market rate for the gold and silver it receives, thusly pocketing the difference between this below-market rate and the current spot rate as profit.
According to the company's third-quarter operating results, it locked in a cash operating margin of $887 per ounce of gold and $12.44 per ounce of silver. This is how Wheaton has consistently produced some of the highest operating margins in the industry, and it's a big reason why the company is able to pay out a nearly 2% annual dividend.
Wheaton Precious Metals also has a fairly diversified production portfolio. In other words, it's not wholly reliant on any single mine to help meet its financial growth goals. The more deals the company has on its books, the less likely it is that a single disruption will impact results.
As an example, Primero Mining's San Dimas mine has had multiple issues in 2017 with labor disputes and machinery problems, which has reduced the silver output of the mine. Though clearly not a positive for Wheaton, since it'll result in a potentially smaller silver stream, it's not the end of the world, either, with higher production at numerous other mines helping to assuage this weakness.
Sure, penny stocks might offer a glimmer of hope from time to time, but big companies like Wheaton Precious Metals can offer the full package -- along with a good night's sleep.
IMAGE SOURCE: NORTHWEST PIPE COMPANY.
A pipe to profits
Todd Campbell (Northwest Pipe Company): Wastewater isn't a sexy business, but selling the pipes necessary to transport water could be a very profit-friendly business if President Trump convinces Congress to pass an infrastructure spending bill.
Northwest Pipe Company makes welded steel pipe and tube products for use in water transmission projects, and it's the biggest manufacturer of engineered steel pipe water systems in North America. It operates manufacturing facilities throughout the U.S., so it's in a great position to bid on projects across the country.
According to the American Society of Engineers, many U.S. water systems were constructed between 1950 and 1980, and are beginning to require updates. An estimated $150 billion needs to be spent on water and wastewater projects by 2025, but we're on pace to fall about $105 billion shy of that target. If an infrastructure spending plan includes water and wastewater upgrades, then demand for pipe would be a boon to Northwest Pipe, both in terms of volume and price.
However, this stock could still be a good investment, even if water and wastewater projects fail to win support. Historically, the company's effective tax rate has exceeded 30%, so tax reform that lowers the corporate tax rate to 21% from 35% provides a nice tailwind. Nationally, gross domestic product (GDP) growth is boosting construction of new water systems, and Northwest Pipe estimates that between 2016 and 2019, the compounded annual growth in new water project construction starts will be 11%.
Northwest Pipe's stock isn't overly expensive, either. Its shares were trading in the mid-$30s as recently as 2014, and currently, its price-to-book ratio is only 0.90.
NWPX Price to Book Value data by YCharts.
Demand for Northwest's pipe could climb because of GDP growth and an infrastructure bill, and the company's trading at less than its book value. Because of this, I think it's a much better investment opportunity than penny stocks.
