Stocks under $5 a share (aka penny stocks) are rarely worth considering as an investment vehicle. Companies that occupy this portion of the equity price spectrum tend to have major fundamental flaws, poor management teams, and/or unfavorable competitive positions within their industry.
On occasion, however, some of these stocks turn out to be diamonds in the rough. Speaking to this point, several of the best-performing equities over the prior 12 months were former penny stocks.
Which low-priced equities might be the next big winners? While it is impossible to accurately predict big price movements within this highly volatile group, I think Sorrento Therapeutics (SRNE.Q 11.96%) and SNDL (SNDL -3.42%) are both building a solid foundation for long-term success. Here is a brief overview on the pros and cons associated with each of these penny healthcare stocks.
Sorrento Therapeutics: An ocean-sized valuation gap
Sorrento Therapeutics is the epitome of a high-risk, high-reward stock. The company sports a broad product portfolio and clinical pipeline spanning high-value areas such as cancer, COVID-19, and pain management.
Sorrento's most valuable product candidate, though, is arguably its third-generation tyrosine kinase inhibitor, abivertinib.
This drug is presently in late-stage development for advanced non-small cell lung cancer, and in mid-stage development for metastatic castrate-resistant prostate cancer. Both of these indications are multibillion-dollar annual drug markets.
What's the catch? Sorrento is a cash burning machine. Per its latest 10Q filing, the company lost $219.5 million in the second quarter of 2022. What's more, Sorrento only had $70.3 million in cash and cash equivalents at the end of the most recent quarter.
The long and short of it is that Sorrento's share price would probably be well north of $5 if the company were on better financial footing. The good news is that Sorrento ought to be able to overcome this key overhang so long as abivertinib continues to hit the mark in the clinic.
Wall Street, in fact, thinks this bio-penny stock could appreciate by an astounding 724% over the next 12 months.
SNDL: A diversified cannabis play
SNDL, like nearly every Canadian pot stock, has struggled mightily of late. The vast oversupply of cannabis in Canada has crushed profit margins within the emerging space. The bottom line is that the industry desperately needs to consolidate in order for any of these companies to consistently turn a profit. So, as things stand now, the name of the game for Canadian cannabis companies is survival.
Over the past two years, SNDL has been steadily building a highly diversified business with this simple goal in mind. Earlier this year, the pot titan completed its acquisition of one the largest private-sector retailers of alcohol in North America, resulting in a 2,344% increase in net revenue in the most recent quarter.
The company has also ramped up its cannabis investing joint venture known as SunStream Bancorp. Last but certainly not least, SNDL has shored up its long-term financial outlook by zeroing out its debt and increasing its cash, marketable securities, and long-term investments to a healthy 900 million Canadian dollars at last count.
With SNDL on solid financial footing, the company seems more than capable of evolving into one of Canada's premiere cannabis companies over the course of the current decade. Now, this value proposition won't come to fruition overnight. But Wall Street's 12-month price target does imply a healthy 61.7% upside potential from current levels. Longer-term, however, SNDL's shares could quite possibly deliver 10x returns for patient investors.