Estimated read time: 4 minutes
Publication date: 20th May 2021 11:37 GMT+1
Investing in penny stocks might seem an attractive strategy to generate exponential gains. However, investors should realize that purchasing penny stocks carry significant risks due to the volatile nature of these instruments and the lack of visibility in some cases. Further, just because a stock has a low share price does not mean it cheap.
You need to analyze each stock carefully before you make an investment decision. The due diligence process is even more important if you want to build a penny stock portfolio. Penny stocks are some of the most widely traded companies by Robinhood investors as they are viewed as an instrument that can derive outsized returns. Here, we take a look at three popular penny stocks that Robinhood investors are buying.
The first penny stock on the list is OrganiGram Holdings (NASDAQ: OGI). Shares of this Canadian cannabis giant are trading at $2.62 indicating a market cap of $783 million. OGI stock is down 68% from record highs despite gaining over 100% year to date.
In the second quarter of fiscal 2021 (ended in February), OrganiGram’s net revenue was down 37% year over year at CA$14.64 million. This decline can be attributed to lower pot prices, as well as lower wholesale revenue.
OGI reported a gross profit of a negative CA$17.19 million compared to a gain of CA$11.28 million in the prior-year period. A negative gross margin was due to inventory write-downs and oversupply issues.
In fiscal Q2, OrganiGram sold 3,688 kgs of dried cannabis a decline of 10% year over year. The company can produce around 76,000 kgs of cannabis annually and we can see it grappling with lower than expected demand. This in turn has led to lower cannabis prices and falling profit margins. OGI in fact reported a net loss of CA$66.39 million in Q2 which was 4.5x its sales.
However, there are a few things going right for OrganiGram. It acquired the Edibles & Infusions Corporation, a hugely popular brand in Canada’s cannabis edibles market. Further, British American Tobacco also purchased a 19.9% stake in OGI that will help the latter improve its liquidity position and focus on accretive acquisitions going ahead.
A large-cap penny stock on my list is Nokia (NYSE: NOK). In the March quarter, Nokia’s net sales were up 3% year over year. After excluding foreign exchange fluctuation, sales grew 9% to $6.2 billion. Nokia experienced strong enterprise sales and customer additions allowed it to increase revenue by 14% year over year in this business.
The growth in revenue also helped the telecom giant improve profit margins due to its shift towards high margin 5G products and cost efficiencies. The company’s gross margin rose 260 basis points to 37.9% while the operating margin stood at 8.5%. In Q1 of 2020, Nokia reported a negative operating margin of 1.5%. Its net income was up 11x at $455 million much higher than analyst estimates of $109 million.
In 2021, Nokia’s management has forecast sales between $25 billion and $26.4 billion, and its operating margin is estimated between 7% and 10%. Nokia stock is trading at $4.94 and has gained 28% in 2021. However, in the last five years, it has generated returns of just 10% and in the last 10-years, the returns are an abysmal -21.3%.
Another Canadian pot stock that makes the penny stock list is Sundial Growers (NASDAQ: SNDL). There are several reasons why Canadian marijuana companies including Sundial have grossly underperformed the broader markets or their peers south of the border. These include high inventory levels, negative profit margins, and a thriving black market among many others.
Sundial stock is trading at $0.72 per share which is 94% below its record highs. The company recently reported its Q1 results and reported a negative gross profit of CA$3.45 million. Even if we account for inventory write-downs the gross margin was still negative in Q1 due to price pressures. Sundial confirmed it is reducing its product portfolio to focus on higher-margin ones.
Sundial reported an adjusted EBITDA profit of CA$3.3 million but its net loss stood at CA$134.4 million. In the prior-year period, its EBITDA loss was CA$5.6 million. The company managed to reduce its operating expenses to CA$8.1 million in Q1 compared to CA$8.8 million in Q4. Its selling general and administrative costs also fell by 35% compared to the prior-year period.
In case Sundial can increase profit margins and race to profitability in the upcoming quarters the stock might gain momentum and end the year at a higher price.
Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.
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