Penny stocks might seem enticing, given their seemingly dirt cheap share prices, and the prospect that some relatively unknown business could become the next big thing. But most often, penny stocks prove to be a great way to lose money over the long term.
So we asked three top Motley Fool contributors to find alternatives for investors looking to put their money to work today, rather than risk hard-earned capital on questionable stocks. Here's why you might like Chipotle Mexican Grill (CMG 2.41%), iQiyi (IQ 3.53%), and Okta (OKTA -0.69%).
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Don't be fooled by Chipotle's meaty share price
Steve Symington (Chipotle Mexican Grill): It's easy to look at Chipotle and recoil at its price -- nearly $680 per share as of this writing. And to be fair, the stock doesn't look particularly cheap, trading at around 40 times this year's expected earnings.
But after years of being plagued by foodborne-illness scares -- and significantly beefing up its own food-safety practices to well exceed the standards of its peers -- Chipotle's turnaround appears to be gaining momentum. Last month the company delivered its fifth straight quarter of accelerating comparable-restaurant sales growth (comps soared 9.9%, with strength in both transaction sizes and mix), indicating that the company's message and concept continue to resonate with hungry consumers.
Shares did pull back around 6% late last week, however, after an analyst raised concerns over increased pork prices driven by a recent outbreak of African swine fever in China. Chipotle management quickly rebutted the bearish argument, noting that the higher-quality pork the company buys shouldn't be affected, and -- even then -- only represents around 2% of its total food costs. But Chipotle stock still hasn't recouped those losses, leaving opportunistic investors with a chance to pick up shares at a relative discount. All told, I'd wager that Chipotle is better-positioned to consistently create shareholder value than any penny stock the market has to offer.
A Chinese streaming multimedia company
Keith Noonan (iQiyi): If you're intrigued by the high-risk, high-reward dynamic that tends to be the norm with penny stocks, investing in the Chinese tech sector might be up your alley. Chinese tech stocks already tend to be more volatile than their American peers because the performance of the underlying businesses is often harder to predict, and recent turns for the worse in the ongoing trade negotiation saga between the U.S. and China have caused big sell-offs for some promising companies. You can count video-streaming leader iQiyi among the stocks feeling the squeeze.
After climbing as high as $46 following their initial public offering last year, iQiyi shares now trade at around $19. Investors should count on a somewhat bumpy road that's likely to see some unexpected twists and turns, but there's still potential for the company to climb to explosive new heights, as it benefits from and helps promote the adoption of subscription-based streaming video in China.
iQiyi's last quarter delivered 43% year-over-year sales growth, and the company's adjusted loss per share came in much better than expected, as the business temporarily eased up on content spending. However, the company's sales guidance for the second quarter disappointed investors, and sent the stock lower following the earnings report.
iQiyi expects second-quarter sales growth to come in between just 12% and 18%. The big deceleration stems from its advertising business declining -- at least in part because Chinese companies have spent less on advertising as the country's economic growth has slowed. The good news is that the subscription-based business had already been repositioned as the core of iQiyi's growth engine, and weak performance for the advertising unit might wind up being recast as a nonissue if member-services growth continues on its current trajectory. That could translate into huge returns for investors who are willing to weather some volatility.
An under-the-radar tech play
Chris Neiger (Okta): If you're looking for off-the-beaten-path investments that have the potential for significant gains, minus the roulette wheel of investing in penny stocks, then Okta might be a stock for you.
Okta is a leader in the growing field of identity access management (IAM), in which a company assigns permissions to employees and customers so that they access the right data and information on its servers, and are denied the areas they shouldn't be in. Think of Okta as a friendly doorman allowing online users to access their important files, computers, and other online tools, but also keeping users (and any bad actors) away from information they're not supposed to have.
Okta's fiscal 2019 sales increased 56% year over year to $399 million, and subscription revenue jumped 57%. In 2020 management expects steady (albeit a bit slower) growth of 34% at the high end of guidance. In the most recent quarter, the number of Okta customers that generated $100,000 or more in recurring revenue popped 50% from the year-ago quarter.
Okta is still in growth mode, so it's unprofitable right now. But with the company tapping into the expanding IAM market and sales still growing at a healthy clip, it's no wonder that its share price is up more than 100% over the past 12 months. If Okta can continue to increase its customers -- and add more that contribute high-dollar recurring revenue -- then this rising tech play might make an excellent addition to your portfolio.
