Many new stock pickers are naturally attracted to penny stocks. The logic is that they can easily buy hundreds (or thousands) of shares of a company that trades for under $1 with only a few hundred dollars. The same can't be said for "expensive" stocks that trade for over $100 per share.
However, we Fools know that penny stocks are usually a bad bet for investors. So which stocks do we think penny stock lovers should focus their time and attention on instead? We asked a team of Motley Fool investors to weigh in, and they picked AMC Networks (AMCX 5.66%), Xcel Energy (XEL 0.56%), and Mitek Systems (MITK 2.05%).
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The zombie apocalypse is not just around the corner for AMC Networks
Anders Bylund (AMC Networks): The cable content studio has trailed behind the broader market recently, falling 25% lower in three years while the S&P 500 benchmark marched 35% higher. At the same time, AMC's business never stopped growing.
Trailing sales increased by 18% over the same three-year period while EBITDA profits surged 32% higher and adjusted earnings per share soared to a 69% increase.
As a result of these contradictory trends, AMC's shares are trading at ridiculously low prices today. You can buy this stock for just eight times trailing earnings or 3.4 times EBITDA. In short, the stock is priced as if end times were near -- despite plenty of proof that the business is showing healthy growth.
It's true that the traditional cable industry is suffering as viewers move over to digital video streaming services at an alarming and accelerating rate. But AMC is hedging its bets by making hit shows like The Walking Dead and Better Call Saul available on leading streaming platforms Hulu and Netflix (NFLX 4.17%). The low stock prices have also given rise to rumors that one of the streaming leaders might just boost their content production chops by acquiring AMC Networks for a song.
So AMC shares give you a premium content producer in an era where content is king, with high-quality financial results to match and a bargain-bin discount price. I'd rather own this proven winner over whatever rickety penny-stock gamble might be popular this week -- especially at these low-risk entry prices.
One of the greenest electric utilities, down on its luck
Maxx Chatsko (Xcel Energy): Electric utility stocks have gotten off to a rotten start in 2018, but investors should view that as an opportunity rather than an omen to stay away from the industry. After all, it would be difficult to find another group of stocks more capable of beating the total return of the S&P 500 over the long haul. Xcel Energy is a great example.
Shares have trailed the total return of the S&P 500 by 13% in the last year, but have edged the index in the last three-, five-, and 10-year periods. That includes a total return of 237% in the last decade, compared to "only" 180% for the index. Peering into the company's ambitious strategy for the next decade provides plenty of reasons for optimism.
Xcel Energy, already the nation's second-largest producer of wind energy, plans to generate 60% of its electricity from zero-carbon sources in 2022. A combination of coal-fired power plant retirements, energy efficiency programs, and big investments in wind and solar will be used to achieve that goal. If successful, then the utility would slash its carbon emission in half compared to levels from 2005.
It's important to note that the focus on renewable energy is driven by economics, which makes any utility's renewable energy strategy a top consideration for investors. Simply, wind and solar assets provide significant savings over time because they avoid fuel expenses. Consider that in 2010 Xcel Energy spent 47% of its capital budget purchasing fuel, but that is expected to drop to just 30% in 2022 and 28% in 2027. That will free up more cash flow to invest in growth, double down on renewables, or directly create shareholder value with dividend growth or share repurchases. With a dividend yield of 3.2% today, that's no minor detail.
The "cheapest" stock I follow
Brian Feroldi (Mitek Systems): I was lucky enough to lose a bundle from buying penny stocks when I first started investing. That early experience was painful but it was invaluable for teaching me that it is foolish to only invest in stocks that trade for a low dollar amount. That's why you'll find that my portfolio is full of companies that trade for well over $100 per share today and why most of the companies that I follow trade for at least $10 per share.
However, Mitek Systems is a notable exception. At a recent price of just over $9, this is the lowest-priced stock that I follow. Since I think there are reasons to be bullish on this business, it could be a great stock for price-focused investors to get to know.
Mitek Systems isn't a household name but the odds are pretty good that you've used the company's product, even if you didn't know it. Mitek is a leading provider of mobile image capture software. The company sells its technology to thousands of financial institutions that want to offer mobile check deposit to their customers. Offering this solution is a no-brainer decision for most banks because it is far cheaper to deposit a check by using the mobile app instead of processing it at a branch of ATM. Customers also love the convenience of not having to visit their bank in person for such a simple transaction, so it's a win-win scenario all around.
For investors, there's a lot to like about Mitek's business. The company has already achieved profitability and sports a debt-free balance sheet. Better yet, only about 3% of checks that are deposited each year in the U.S. are done on mobile devices, so there's a tremendous runway ahead for growth.
Mitek is in a great position to deliver double-digit revenue and profit growth for the foreseeable future as mobile deposits continue to gain traction with consumers. That's quite enticing for a stock that is currently trading around 23 times next year's earnings estimates.
