Stock returns typically reflect the business performance and outlooks of underlying companies. Therein lies the problem with penny stocks. While companies with low market capitalizations or stock prices may seem appealing since they hypothetically offer more room for growth, the truth is that the vast majority of penny stocks have dismal business prospects, and usually wind up burning investors. 

Instead, narrowing in on companies that have actual competitive advantages, and are positioned to benefit from powerful trends, will help you find stocks capable of delivering stellar performance. In other words, rather than throwing money away on penny stocks, risk-tolerant investors seeking explosive gains should consider adding the following three companies to their portfolios.  

A penny on top of dollars.

Image source: Getty Images.

1. Peloton: Exercise equipment meets tech and content platform

Perhaps you, or someone you know, uses Peloton's (PTON -2.02%) products, or perhaps you're familiar with the company because of a short-lived internet controversy surrounding one of its advertisements. Whatever the case, Peloton has been one of the best-performing stocks in 2020, and growth-focused investors will likely want to keep an eye on it. 

The company's core products are in-home exercise bikes and treadmills with a touchscreen that allows users to watch guided exercise content and navigate its software platform for selecting workouts and tracking fitness data. The business generates revenue from the sale of exercise hardware and subscription-based exercise content services. 

The coronavirus pandemic has spurred a huge increase in demand for in-home exercise equipment, and this trend helped Peloton grow sales 172% year over year to reach $607.1 million in the fourth quarter. It looks like more big growth is on the way.

The company anticipates that it will end the current fiscal year with between 2.05 million and 2.1 million connected fitness subscriptions, good for 90% annual growth at the midpoint of the target. Full-year revenue is projected to come in between $3.5 billion and $3.65 billion, representing 96% annual growth at the midpoint. A recent price cut for its core exercise bike model, the launch of a new premium bike, and the upcoming release of its new treadmill will likely play a big role in driving momentum, and Peloton stock could soar again if these catalysts once again help the business beat its membership and sales targets. 

2. Huya: Tap into the surging gaming industry 

Video games have never been more popular, and watching other people play games has become one of the most popular categories of videos on the internet. Huya (HUYA -2.23%) is a China-based tech company that provides a platform for broadcasting gameplay footage and commentary, and it has a huge runway for growth.

Huya has a market capitalization of roughly $5.3 billion and is valued at roughly 30 times this year's expected earnings, and its valuation looks cheap in the context of the business' rapid growth. The company generates revenue from its small but fast-growing advertising business, and by taking a cut of payments that users make to broadcasters. 

Huya's total revenue jumped 34% in the second quarter year over year to reach $381.8 million, and net income for the period soared 86.2% to reach $32.1 million. Donation-based revenue increased 33.5% year over year last quarter to reach $363.1 million, accounting for roughly 95% of total sales. Advertising segment sales jumped 48.6% compared to the prior-year period, despite a weaker market for ads created by the coronavirus pandemic, and came in at $18.7 million in the period.

Both of the company's business segments look primed for substantial growth over the next five years as Huya continues to expand its global audience and builds out content offerings. The company could also see significant benefits if its proposed merger with chief competitor DouYu goes through. The overall video game industry is benefiting from an expanding global audience and rising consumer spending. These tailwinds extend to gaming-video content and esports, and could lead to fantastic performance for top players in these spaces. 

3. Impinj: An underappreciated Internet of Things play

Even people who are familiar with the Internet of Things (IoT) are probably underestimating the scope of its potential applications and impact. A typical conception of IoT extends to technologies such as driverless cars or apps and devices that allow you to remotely control everything from your home security system to your refrigerator.

These evolutions will certainly bring new conveniences that allow people to save time and make life easier, but the most important aspect of IoT is actually the gathering and analyzing of wide swaths of new data. Much of that data will come from objects outside of automobiles, appliances, and consumer electronics.  

Impinj (PI -1.15%) is a company that could play a huge role in bringing non-electronic devices into the world of networked information and analytics. The company makes radio-frequency-identification (RFID) tags, readers, and software, and its technologies pave the way for a much wider selection of objects to take part in the IoT and data analytics revolutions. 

Impinj's technologies are already at work in fields including retail, manufacturing, and healthcare -- helping to improve supply chain efficiency, monitor consumer demand, and improve end consumer safety by making sure that products have met necessary standards and services have been completed correctly. Big coronavirus-driven contractions in the retail category have put a serious damper on the company's sales and pressured the stock, but there's a good chance Impinj will bounce back and deliver fantastic stock performance.