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Penny stocks come with a significant amount of risk and, therefore, the expectation of higher returns. However, not all penny stocks fire. Some stocks represent companies with significantly weak fundamentals, and it translates into continued value erosion for investors.
The focus of this column is on penny stocks with stories backed by decent fundamentals. Further, I believe there are one or a few impending catalysts for these companies. If the catalysts play out, the penny stocks can skyrocket and deliver 5x to 10x returns.
I would not be overly optimistic when it comes to the investment horizon. It’s good to be prudent with macroeconomic headwinds. However, I can say with some conviction that these penny stocks can be 5-baggers or 10-baggers within the next 36 months.
Let’s discuss the factors likely to trigger a massive rally in these undervalued penny stocks.
Standard Lithium (SLI)
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After a big crash in lithium prices, investors seem unwilling to touch lithium stocks. I would, however, use this as an opportunity to buy at deeply undervalued levels. Standard Lithium (NYSE:SLI) plunged by 71% in the last 12 months and is among the list of risky penny stocks to buy.
I believe the stock can deliver 10x returns in the next three years under two conditions. First, lithium has a reversal rally and remains in an uptrend. That seems likely, with some analysts expecting a lithium shortage as early as 2025.
Further, another big catalyst is financing for project construction. If Standard Lithium secures significant funds, the stock will skyrocket. It’s worth noting that the company’s key asset has an after-tax net present value of $4.5 billion. However, the asset requires an investment of $1.2 billion. Securing the funding would boost prospects of commercialization in 2026 or 2027.
Bitfarms (BITF)
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With the outlook for Bitcoin (BTC-USD) remaining bullish, I would consider exposure to Bitcoin miners. Among penny stocks, Bitfarms (NASDAQ:BITF) looks undervalued. If the cryptocurrency surges above $100,000, BITF stock could deliver 5x to 10x returns.
I must mention here that Standard Chartered believes Bitcoin could touch $200,000 by the end of 2025. If that scenario holds, BITF stock will likely go ballistic, and 10x returns would look minuscule.
Specific to Bitfarms, there are two reasons to be bullish. First, the company has a strong liquidity buffer of $118 million as of December 2023. Also, Bitfarms should soon be debt-free, providing the company with high financial flexibility.
Further, Bitfarms has aggressive expansion plans. As of Q4 2023, the company reported a hash rate capacity of 6.5EH/s. It expects to boost capacity to 21EH/s by the end of the year. With a tripling of capacity, Bitfarms is positioned for stellar growth coupled with upside in cash flows.
Tilray Brands (TLRY)
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Tilray Brands (NASDAQ:TLRY) is another name among penny stocks that can easily deliver 5x or 10x returns. While the stock has remained in a downtrend, business developments remain positive. It’s also worth mentioning that if cannabis is legalized at the federal level, 5x returns are likely in the blink of an eye.
For Q2 2024, Tilray reported record revenue of $194 million, higher by 34% on a year-on-year basis. In the cannabis segment, the company is already the market leader in the European medicinal cannabis market. That supported a 55% growth in international cannabis revenue for the quarter.
Further, with a flurry of acquisitions last year, Tilray positioned itself as the fifth-largest craft beer brewer in the United States. With diversification, the company seems well-positioned for sustained growth. From a financial perspective, Tilray expects to generate positive adjusted free cash flow for the financial year 2024. As financial flexibility improves on the back of swelling cash flows, Tilray will be positioned to make aggressive investments.
On Penny Stocks and Low-Volume Stocks: With only the rarest exceptions, InvestorPlace does not publish commentary about companies that have a market cap of less than $100 million or trade less than 100,000 shares each day. That’s because these “penny stocks” are frequently the playground for scam artists and market manipulators. If we ever do publish commentary on a low-volume stock that may be affected by our commentary, we demand that InvestorPlace.com’s writers disclose this fact and warn readers of the risks.
Read More: Penny Stocks — How to Profit Without Getting Scammed
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
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