Please ensure Javascript is enabled for purposes of website accessibility

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

By Rich Duprey - Updated Mar 31, 2021 at 11:09AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

For just a little more money you can buy vastly better businesses.

Penny stocks hold an allure for investors, particularly those who are new to the market, because they offer a chance to own a lot of shares for relatively little money. All those stocks need to do is move up literally by pennies, and that would translate to huge profits.

Unfortunately, most penny stocks are that cheap for a reason. Many of them don't even have a product or service that consumers can buy, and they're running more on a storyline about how big they could theoretically get. Instead of making a killing, penny stock investors are often slaughtered.

That's why the stocks below are better investments. They might cost a few dollars more, but you'd be getting a better business with a proven track record of profitability and with products in demand by customers.

Stacks of pennies on a stock chart.

Image source: Getty Images.

Atlas Air Worldwide

You might never need the services of Atlas Air Worldwide (AAWW 1.78%) yourself, but if you regularly order from Amazon.com, there's a good chance your package is being shipped on one of its planes.

Amazon uses several freight carriers to help ship the billions of packages the e-commerce giant delivers every year. Atlas, though, is somewhat unique in that Amazon has a financial interest in it -- warrants were issued that, if fully exercised, would give Amazon a nearly 40% ownership stake in the company (Air Transport Services Group is similarly positioned).

Yet Amazon isn't Atlas' only big customer. Atlas operates the world's largest fleet of 747 freighters, and its Polar joint venture with DHL provides air cargo capacity to the carrier. The company's revenue in the fourth quarter was up 46% and per-share profits were 37% higher from the year ago period, and it's forecasting first-quarter adjusted net income will rise by 60% to 65%.

Atlas has significant debt -- some $2.3 billion in long-term debt and operating leases -- and it also has had contract issues with its pilots stemming from an earlier acquisition, which has weighed on its stock's performance. And a global economic downturn could negatively impact its business. Still, demand from consumers on e-commerce retailers should keep Atlas flying high. It is still experiencing higher demand for its aircraft, momentum that is carrying forward into the new year.

Atlas' stock trades at some extreme discounts. It is priced at 4.5 times its trailing earnings and 7 times next year's estimates, and it goes for less that 2 times the free cash flow it produces. This could be an investment that takes flight.

Camping World Holdings

RV retailer and lifestyle leader Camping World Holdings (CWH -0.26%) has benefited from consumers' desires to get away into the great outdoors during the pandemic. Full-year sales were up 11% in 2020, and the fourth quarter saw a 17% rise from the year-ago period.

Now Camping World is using the opportunity to embrace its RV lifestyle by embarking on a growth-by-acquisition strategy. In just the past week, Camping World bought four small companies, doubling the number of acquisitions it has made since the start of the year. It's also looking to expand into more states where it doesn't already have a presence to bring RVs closer to consumers looking to head into the wilderness.

Despite the hefty appetite, Camping World's debt-to-equity ratio of 0.95 isn't terrible, and it still generated $660 million in free cash flow (FCF) over the past year. It has plenty of liquidity and has about $166 million of cash and equivalents in the bank.

Camping World also trades at a severely discounted valuation. It goes for less than 0.6 times its sales, a third of its projected earnings growth rate, and only 5 times free cash flow, making its stock a bargain opportunity.

Smith & Wesson Brands

The firearms market is hot, and as the largest manufacturer, Smith & Wesson Brands (SWBI 0.53%) has been leading the way with record sales, which have doubled for three consecutive quarters.

Gun manufacturers are in the midst of an unprecedented wave of firearm sales, many from people who never purchased a firearm before. The National Shooting Sports Foundation says as many as 40% of the guns sold during last year's record-breaking year were to first-time buyers. And 2021's pace for sales is well ahead of last year.

Yet the market is significantly undervaluing Smith & Wesson's stock. Not that the gunsmith is often trading at exorbitant multiples (during the so-called Trump slump, they did soar as profits plummeted), but shares are going for 8 times next year's earnings estimates, a fraction of Smith & Wesson's sales, and for less than its earnings growth rate. At a bargain-basement valuation of just 3 times free cash flow, the gunmaker looks ready to shoot out the lights.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Atlas Air Worldwide Holdings, Inc. Stock Quote
Atlas Air Worldwide Holdings, Inc.
AAWW
$69.72 (1.78%) $1.22
Smith & Wesson Brands, Inc. Stock Quote
Smith & Wesson Brands, Inc.
SWBI
$15.20 (0.53%) $0.08
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$2,302.93 (3.66%) $81.38
Air Transport Services Group, Inc. Stock Quote
Air Transport Services Group, Inc.
ATSG
$31.45 (6.75%) $1.99
Camping World Holdings, Inc. Stock Quote
Camping World Holdings, Inc.
CWH
$27.42 (-0.26%) $0.07

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

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
344%
 
S&P 500 Returns
120%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.