Although retail investors have been putting their money to work in the stock market for more than a century, we've witnessed this collective group rock the boat more than ever before -- and Wall Street has been put on notice.

Unfortunately, the stocks retail investors have chosen to invest in aren't always of the highest caliber. In fact, they've had an unhealthy fascination with penny stocks.

A penny standing on its side atop a newspaper clipping that depicts a rising one-year chart.

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Typically, penny stocks are bad news

Penny stocks are publicly traded companies with share prices of $5 or less. Retail investors have the (incorrect) perception that being able to buy more shares of a company gives them a greater chance of striking it rich while investing in the stock market.

The problem with this thesis is that penny stocks typically trade at nominally low share prices for a very good reason. In many instances, penny stocks have unproven or poorly performing operating models, questionable balance sheets, or a monstrous number of shares outstanding. (I'm looking at you, Sundial Growers, for having issued 1.35 billion shares of common stock in just a seven-month stretch.)

In other words, penny stocks are rarely worth the hassle and usually fail to deliver for their shareholders.

However, once in a blue moon, hidden gems with solid long-term outlooks can be uncovered. The following three companies are what I'd consider to be the smartest penny stocks you can buy right now.

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Harvest Health & Recreation

Cannabis is projected to be one of the fastest-growing industries in North America this decade. But make no mistake about it -- there's a massive difference between the U.S. and markets like Canada and Mexico.

By the midpoint of the decade, New Frontier Data is forecasting the U.S. could hit $41.5 billion in annual weed sales. That'd likely represent about 80% of all North American pot sales, if not more. That's why U.S. multistate operator (MSO) Harvest Health & Recreation (HRVSF) can be confidently bought, even with a share price under $4.

There are two reasons Harvest Health makes for such a no-brainer buy. To begin with, it's in the process of being acquired by MSO Trulieve Cannabis (TCNNF -5.97%) in an all-stock deal that was initially valued at $2.1 billion. As of the close of trading on June 21, Harvest was 9% below the share-conversion price (0.117 shares of Trulieve for every share of Harvest Health), based on where Trulieve was trading. That's a healthy arbitrage opportunity, assuming the deal closes. 

To build on this point, you'd own shares in Trulieve Cannabis -- a top-tier MSO -- when the deal is completed. Trulieve has 90 operational dispensaries, controls roughly half of Florida's medical marijuana market, and has delivered 13 consecutive profitable quarters. It's the gold standard among marijuana stocks.

The second reason to buy Harvest Health is that you'd be just fine if the Trulieve deal somehow doesn't go through. Harvest has a five-state focus, with a little over three dozen operational dispensaries. Most important, it holds the market edge in Arizona, which legalized recreational cannabis in November and began selling adult-use weed in January. Harvest's 15 dispensaries in the Grand Canyon State should give it significant share of what may well be a billion-dollar annual market.

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Invesco Mortgage Capital

If value and dividend income are more your thing, say hello to mortgage real estate investment trust (REIT) Invesco Mortgage Capital (IVR -0.70%). Invesco closed June 21 with a share price just above $4, though it sports a respectable market cap of $1.1 billion.

In simple terms, mortgage REITs are companies that seek to borrow money at lower short-term rates and acquire assets with higher long-term yields. The difference between this higher long-term yield and lower short-term borrowing rate is known as the net interest margin. As you can imagine, the wider this net interest margin, the more profit a mortgage REIT can potentially generate.

At this time last year, Invesco would have had zero chance of making this list because it had a portfolio packed with commercial mortgage-backed securities and credit risk transfer securities that were non-agency. In other words, they weren't backed by the federal government in the event of a default.

Over the last year, however, Invesco has shifted its focus to buying agency securities. Even though these have lower long-term yields, the safety they provide will allow Invesco to utilize leverage to its advantage to increase profits.

Another thing to consider about mortgage REITs is that they typically do really well during the early stages of an economic recovery. When the U.S. economy is rebounding, it's normal to see the yield curve steepen. This means long-term bond yields rise, while short-term yields flatten or decline.

When this happens, we often see an expansion in the net interest margin for most mortgage REITs. This leads to higher book values and, in some instances, juicier dividend payouts. Invesco is currently yielding 9%!

A messy stack of gold ingots set next to Ben Franklin's image on a one hundred dollar bill.

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Yamana Gold

A third penny stock that can make your portfolio a lot more lustrous is gold stock Yamana Gold (AUY). Don't let its $4.43 share price fool you, because this is a mid-cap company with a $4.3 billion market cap.

To state the obvious, Yamana is going to benefit if the price of physical gold heads higher -- and there are plenty of reasons to believe it will. Historically low lending rates and a monthly bond-buying program from the Federal Reserve have helped weigh down long-term bond yields. Meanwhile, expectations are rising for inflation. Whether it's a near-term or medium-term catalyst, the outlook remains bright for physical gold.

But there are more reasons to be excited about Yamana than simply a higher gold price. For one, the company has made significant strides to improve its balance sheet.

Like most gold miners, Yamana was a bit overzealous last decade and took on quite a bit of debt. But since about the midpoint of the previous decade, it's reduced its net debt from $1.7 billion to almost $300 million. Historically high cash flow has allowed Yamana to reduce its debt load and more than double its dividend on a year-over-year basis.

Yamana's flagship Canadian Malartic mine, which is 50/50 owned with Agnico Eagle Mines, remains a shining star. Production in the first quarter jumped to nearly 90,000 ounces, up from shy of 65,000 ounces in the year-ago quarter. When coupled with the relatively new output from Cerro Moro, Yamana has a very good chance to yield 1,000,000 gold equivalent ounces on an annual basis for at least the next three years. 

After following gold stocks for more than a decade, I've come to the conclusion that a multiple of 10 times cash flow represents a fair valuation for companies not overwhelmed by debt. Yamana, at just five times Wall Street's operating cash flow consensus for 2021 and 2022, is a screaming buy.