The markets have been hyper volatile on novel coronavirus fears (and, some argue, some overvaluation concerns). With a 4,000-point fallout from the Dow Jones Industrial Average, why on earth would any investor bother with penny stocks? Sure, there's potential for big returns. There is also huge potential for big-time losses.
If you're seriously yearning for that risk-reward stock play, take a look at some larger, more established names that offer both risk and reward. Here are three better ways to invest your money than penny stocks.
1. Take a swing at a battered big bank instead
Royal Bank of Scotland Group (NYSE:RBS) has faced a brutal decade: a weaker era for U.K. banking, the turmoil of and criticism about being bailed out back in 2018, the infamous Brexit debate, and most recently, the COVID-19 sell-off. Last week, the bank announced it was changing its name to NatWest in an obvious attempt to distance itself from a troublesome reputation. Analysts' price targets are going up and down with estimates all over the place. If you're looking for a risky play that could garner some big upside, this is a prime example.
The bank also announced new plans to cut back its exposure to financing for fossil fuels. In particular, it intends to end its financing of coal activities altogether. It also plans to scale back investment banking. Royal Bank of Scotland is in a state of real change.
As a whole, British banks do not offer the best earnings in the land. RBS has made significant progress in shifting itself out of losses and into profitability. But the bank has changed its targets for return on equity (ROE) multiple times; Friday, guidance was revised to a range of 9% to 11%.
What makes RBS a compelling play for a high-risk investor is its current valuation relative to book value. At the end of 2019, RBS reported total equity of 43.56 billion pounds on the balance sheet. Converting that to $55.85 billion in U.S. currency gives the stock a book value of $9.23 per share, versus the current trading price of $4.63. That's a nice 50% discount on tangible book value. It's tough to find that in a penny stock.
Though earnings might not be huge, this bank stock is cheap relative to those earnings, with a P/E ratio of 7. As an added bonus, it currently offers a dividend yield of 9%. Because RBS is an established company going through quite a bit of turmoil, shares have become so cheap that they offer big upside should good news occur. If you're seeking big gains potential, this bank is a far safer alternative.
2. Look to speculative tech
There are plenty of highly speculative, yet more intelligent plays within the tech and social media sectors. Pinterest (NYSE:PINS) has disappointed since its initial public offering last March; shares are down 20% from their IPO price. The pricing has been entirely speculative, as Pinterest lost a collective $193 million between 2017 and 2018; 2019 was even worse, with $1.36 billion in net losses. Research and development expenses went through the roof in the second quarter of 2019, to $1.2 billion, accounting for most of the loss.
Looking ahead, Pinterest is putting together very nice sales growth. With 46% revenue growth year over year in the fourth quarter, and 51% growth for the full year to $1.14 billion, there is definitely a business there if Pinterest can manage the costs. The company provided 2020 revenue guidance of $1.52 billion, which would mark 33% growth from 2019. Analysts are estimating earnings of $0.06 per share in 2020. While that certainly doesn't justify the current share pricing of $19.72, it could mark the start of a longer story; 2021 estimates call for $0.26 per share.
If the current market fallout becomes an even deeper dive, Pinterest shares might become very appealing for those looking for long-term plays. They're a gambit on future potential, but it's still much more sensible than penny stocks.
3. Avoid high risk and speculation altogether
With the recent market dip, you may not have to work too hard to find a good deal. Why pour hard-earned money into risky ventures when you can buy the market at a discount? The SPDR S&P 500 ETF (NYSEMKT:SPY) is a large-cap blended fund that tracks the S&P 500. Through this ETF, you can gain full exposure to the big pullback that we saw last week.
With the last six months of market gains essentially wiped out in a couple of weeks, this could be a good entry point for a long-term time horizon. Timing is something to consider right now, as further turmoil from the coronavirus outbreak could very easily wreak further havoc on the market in the short term.