Penny stocks can be an exciting place for investors because shares can be extremely volatile and gains can be made very quickly if you pick the right stock. But most penny stocks are speculative investments and fail to even beat the market.
If you're looking for better odds than penny stocks, our Motley Fool contributors have three picks for you that could provide some big gains if you're willing to take a longer-term view. Here's why Fisker (NYSE:FSR), TPG Pace Beneficial Finance (NYSE:TPGY), and Steel Dynamics (NASDAQ:STLD) are the kind of growth stocks we would buy today.
A new way to make electric vehicles
Travis Hoium (Fisker): Electric vehicles have been extremely hot over the past year as Tesla has become one of the most valuable companies in the world and multiple new EV companies have hit the market. One that's new and providing an innovative business model that could bring with it lower risks and higher upside for investors is Fisker.
Unlike most automakers, Fisker isn't spending billions of dollars building auto manufacturing plants. It has partnered with Magna International (NYSE:MGA) to be its contract manufacturer of electric vehicles in Europe with potentially more partnerships to come. The company is also contracting out delivery, servicing, and fleet management to partners, initially in the U.K., but the model is not to "own" those parts of the business either.
It's not unusual for automakers to contract out some manufacturing, but final assembly usually falls to the auto company themselves. Why?
If we look at Apple's model in smartphones, it does design and software, but doesn't do any (or much) of its own manufacturing, which is contracted out to experts in low-cost regions. Fisker is trying to bring some of that model to its business, making for an asset-light business model.
There's potential for downside if this model doesn't work or if Fisker's vehicles don't sell well, but there's evidence that interest exists and the upside is tremendous. There are already more than 10,000 reservations for the Fisker Ocean, over a year before launch, and management says that at launch Fisker will have the ability to sell over 100,000 vehicles annually -- and that's without investing in manufacturing.
If Fisker is successful in building an asset-light auto company it could upend the traditional auto manufacturing model and provide huge gains for investors.
Bet on EV infrastructure
Howard Smith (TPG Pace Beneficial Finance): Investing in penny stocks is a lot like playing roulette: place a bet with very low odds of winning, but with potentially a big payoff. But those stocks are typically penny stocks for a fundamental reason.
So if you want to make a speculative investment, why not look for that big payoff in a young industry that is a bet on more than just luck? The electric vehicle (EV) industry looks to be well on its way to having meaningful market share in transportation. Regardless of the specific winners in vehicle sales, the industry will need charging infrastructure. EVBox already has the largest network in Europe, and the company will soon be trading publicly after it closes its merger with special purpose acquisition company (SPAC) TPG Pace Beneficial.
Of course, there will be competition in the charging infrastructure industry, too. But several of those names have already grown to lofty valuations. EVBox is a 10-year-old company that owns Europe's largest EV charging station network, and a total of over 200,000 charging ports in more than 70 countries worldwide. That total has doubled in just a little more than a year.
EVBox also has a North American headquarters, and expects the number of its charge ports shipped to grow at a compound annual rate of 65% over the next three years. Management forecasts its revenue will increase even more rapidly, from about $85 million in 2020 to an estimated $450 million in 2023.
Once the transaction is completed -- which is expected to be the first quarter of 2021 -- EVBox would have a market capitalization of almost $3.5 billion at the current share price of $24.55. That's not cheap, but at less than eight times estimated 2023 revenue, it's also not unreasonable.
The bet is that the industry blossoms, and management's growth estimates come to fruition. Neither is a given, but it's a better wager than sinking money into penny stocks based only on hope.
Riding a huge trend, trading at a cheap price
Jason Hall (Steel Dynamics): One of the things that can be appealing about penny stocks is that they look cheap, with share prices trading for single digits, or even less than a dollar. And with stock market valuations stretched, people are on the hunt for a bargain. Of course, penny stocks are almost never actually "cheap," and are rarely attached to companies worth even owning.
If it's a bargain you're looking for, Steel Dynamics is worth a look. One of the best steelmakers in the U.S., Steel Dynamics utilizes highly scalable electric-arc furnaces to make steel, giving it a lot of operating flexibility across the steel market's ups and downs. It also allows it to utilize steel scrap versus raw iron, making it a more environmentally responsible steel producer.
As a result, it's been a market-beating long-term investment.
Another thing we can learn from the chart above: Investors haven't been sold on steelmakers over the past couple of years. And I think that's created an excellent opportunity for investors to buy Steel Dynamics. For years, we have heard about the aging infrastructure in the U.S., and there's growing political will to address it. Globally, demand for steel is on the rise as the global middle class grows larger and cities need to build more and more infrastructure to meet future needs.
At recent prices, Steel Dynamics shares trade for about 17 times trailing earnings; that's less than half the S&P 500 average P/E ratio, above 38 times. Add in a strong, steady dividend yield above 2.5% and a long record of payout growth, and there's a lot for bargain hunters to like about Steel Dynamics.
Better ways to invest in growth
These stocks provide growth opportunities for investors without the boom-or-bust nature of penny stocks. And for building long-term wealth, we think they're much better investments in today's market.