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About to Buy Penny Stocks? Look at These 3 Companies First

By Keith Noonan - Jan 2, 2021 at 8:45AM

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If you're willing to take on risk to hit it big, these stocks are better bets.

Investors seeking explosive gains will sometimes turn to penny stocks in hopes of quickly notching big returns. The idea that it's easier to double $1 than it is to double $100 seems pretty intuitive on the surface, but this reasoning typically isn't something you can apply to stock performance and expect good results. 

The vast majority of penny stocks trade at low valuations because the underlying company's performance is relatively weak or its outlook highly speculative, and this category of investments has a reputation for burning investors more often than not. But risk-tolerant investors still have plenty of better options. Read on for a look at three stocks that have plenty of boom potential and much less risk of going bust.

A bull figurine surrounded by cash.

Image source: Getty Images.

1. Airbnb

Airbnb ( ABNB 8.46% ) had its initial public offering on Dec. 10, and shares have seen volatile trading since. The online short-term accommodation rental company priced its stock at $68 per share, but its price had been bid up to $146 by the time the stock opened for trading on the public market.

Airbnb has seen some significant swings since its IPO, but the stock is currently back in the range of $150 per share, valuing the company at approximately $100 billion. That's already substantial, but the company could still have plenty of appeal for risk-tolerant investors seeking potentially explosive gains. 

The company is the clear leader in its service category, and it's disrupting the travel industry. Before the coronavirus pandemic, it was posting strong sales growth and attracting record numbers of users. Sales climbed 32% in 2019 to reach $4.8 billion, and the business has a long runway for growth despite this year's pandemic-related challenges. The company has proved to be surprisingly sturdy, all things considered.

The pandemic clearly adds some unknown variables, but Airbnb stock could see big gains if it shows continued signs of resilience. The business has adapted well despite the challenges of the pandemic, and it's in a good position to continue shaking up the hotel and travel industry once the world moves closer to a state of normalcy. The stock is primed for potentially volatile trading, but strong business performance could wind up recasting its current price as cheap.  

2. Himax Technologies

The stock of Himax Technologies ( HIMX -2.49% ) has more than doubled year to date, and it could be on track for more explosive gains. The company makes computer chips known as display drivers, and an uptick in demand has helped the stock post big gains.

Display drivers regulate the colors displayed by pixels on mobile devices, televisions, and automobile screens, and a stronger upgrade cycle in the phone market is driving a resurgence for Himax. But even after the stellar stock performance this year, the shares are down more than 30% over the last three years.

HIMX Chart

HIMX data by YCharts.

The core display-driver business has long been subject to cyclical trends. Its offerings face pricing pressure until performance is significantly improved and refreshed products in the mobile and television segments once again boost demand. 

Himax reported third-quarter results in mid-November, delivering 46% year-over-year sales growth and more than 280% growth for adjusted earnings. It doesn't look like the strong quarterly results will be a one-off performance. The company is guiding for roughly 72% year-over-year adjusted earnings growth and a 10% increase for sales in the fourth quarter on a sequential basis.

A rebound for the core business isn't the only catalyst that could drive Himax stock higher. The company has devoted substantial resources in recent years to develop solutions for emerging technologies including machine vision and augmented reality. 

Himax has a market capitalization of roughly $1.2 billion and trades at approximately 27 times this year's expected earnings. With the core business posting strong performance again, and with potentially transformative growth opportunities on the horizon, Himax's hot run might just be getting started.

3. Impinj

The ability to gather and analyze valuable data will play a defining role in which businesses succeed and which fail in the 21st century. It's not just computers and mobile devices that will contribute to the data and analytics revolution. A variety of new sensor technologies will extend data connectivity outside the sphere of traditional electronic devices.

Impinj ( PI 6.42% ) is a small-cap company valued at roughly $900 million, and it's working to bring nonelectronic objects into the world of networked data with tags, sensors, and software that use radio frequency identification (RFID). Retail currently stands as the biggest market, with RFID being used to improve the speed and accuracy of inventory tracking and to prevent theft. But Impinj's technologies have much wider potential.

The flexibility and reliability of RFID has also helped Impinj to gain ground in the manufacturing, healthcare services, and airline industries. The coronavirus pandemic's disruption of the retail space this year has meant weaker demand for Impinj's products, but there's a good chance that business will bounce back, and the stock could see strong performance with signs of recovery. If retail demand improves and new RFID applications take hold in other industries, the company's share price could soar.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Airbnb, Inc. Stock Quote
Airbnb, Inc.
ABNB
$180.85 (8.46%) $14.10
Himax Technologies, Inc. Stock Quote
Himax Technologies, Inc.
HIMX
$10.17 (-2.49%) $0.26
Impinj, Inc. Stock Quote
Impinj, Inc.
PI
$75.04 (6.42%) $4.53

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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