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3 Top-Tier Penny Stocks Actually Worth Owning

By Matthew DiLallo - Apr 16, 2013 at 4:06PM

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Penny stocks have a pretty bad reputation. However, three companies that are technically penny stocks are actually well worth a deeper look.

According to the SEC, a penny stock is one that trades below $5 per share. That definition offers a much broader array of companies than those stocks that the "pump-and-dump" crowd would like to see you get caught up in. There are actually some really solid businesses that sell for less than $5 a share; though, I will warn you, they are not without risk.

Pure play on pure water
Environmental services and frack water treatment company, Heckmann (NESC) trades at less than $4 a share. There's a reason for that low share price – the company's business model clouds the market's perception of its future value. Until the company can clear that up, the shares likely will stay in penny stock territory.

The concerns with Heckmann are twofold. First, the market views its business as being tied to the growth of fracking for natural gas. What the market misses is that 70% of the company's shale solutions revenue is tied to the development of oil and natural gas liquids. The market also sees the company's financials being muddied by a steady stream of acquisitions. However, what it misses is that those acquisitions are what's shifted the revenue mix into the major oil- and liquids-focused plays.

If you're not opposed to waiting for Heckmann to clean up the market's perceptions of its business, you'll likely be very well rewarded.

Getting oily
You'll see a recurring theme here, but the three names on my list are all energy companies moving from a focus on natural gas to one on oil and liquids. Among producers, SandRidge Energy (NYSE: SD), and its share price under $5, is a tempting value. The company is the king of the emerging Mississippi Lime formation and has a huge runway of growth ahead of it.

The problem here is that the company bit off more than it could chew to get to this point. It followed the model of Chesapeake Energy (CHKA.Q) much too closely and got itself caught in the gas bubble a few years back, and it has spent billions of dollars it didn't have to transition into oil and liquids. It probably shouldn't surprise you that current SandRidge CEO Tom Ward also co-founded Chesapeake.

The silver lining here is that the company's financial situation is now much more manageable. Further, it's seeing tremendous production growth out of the Mississippian. While it has a way to go to complete its turnaround, at less than $5 its shares are a very compelling value when you consider the potential of the company.

Hunting for value
Until recently, Magnum Hunter Resources (NYSE: MHR) boasted operations in three of the top oil and gas growth plays in the nation. While its recent sale of a bulk of its Eagle Ford acreage to Penn Virginia (NYSE: PVA) knocks it out of that play, the company still has large positions in both the Marcellus, Utica, and Bakken. These core operations should drive the company's liquids-focused growth for years to come.

Like both Chesapeake and Heckmann, Magnum Hunter isn't without its issues. The main reason behind the Eagle Ford acreage sale to Penn Virginia is to help repair its balance sheet. The company picked up almost $400 million in cash which will help reduce its debt. It also gives the company the flexibility it needs to invest in its liquids growth plans.

Those growth plans continue to take shape as just last week the company announced it had begun drilling its first Utica well. Overall, it has plans to spend nearly $350 million this year to drill in its liquids-rich acreage and continue to build its midstream business. While the company is operating under fairly tight financial constraints, at just over $3.50 a share Magnum Hunter is worth a deeper look.

Foolish bottom line
Personally, my money is on Heckmann because I have a lot of oil and gas exposure elsewhere. It's an interesting way to play the environmental side of the growth of domestic oil and gas production. I think the company has a huge runway of growth providing a vital service to the industry. 

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