With a rally of almost 20% in the S&P 500 index, investors need to be cautious. It makes sense to wait for a correction in blue-chip or growth stocks that have skyrocketed. At the same time, there are several names that haven’t participated in the rally or remain attractively valued even after an upside. This column focuses on such undervalued penny stocks that are poised for multi-bagger returns.
As always, I have looked at fundamentally strong stories from the small-cap space. Given the broad market rally, it’s advisable to stay away from purely speculative penny stocks.
I believe that the companies discussed can grow bigger with a sound business model. Further, these companies are positioned to benefit from positive industry tailwinds that are likely to sustain through the decade.
Let’s discuss the reasons to be bullish on these three undervalued penny stocks.
Cronos (CRON)
At a market valuation of $745 million, Cronos (NASDAQ:CRON) is possibly the most undervalued penny stock. The cannabis company reported cash and equivalents of $836 million for Q1 2023. This puts into perspective the extent of undervaluation.
However, a robust cash buffer can’t be the only reason to buy a stock. There are other positive developments for Cronos. As an example, the company has been streamlining operations and expects to be cash flow positive in 2024.
Further, Cronos indicated in July that the company has received “unsolicited indications of interest from third parties.” There can be a possible merger and acquisition scenario.
Coming back to the cash buffer, Cronos is well-positioned to make big investments. In a federal-level cannabis legalization scenario, the company can quickly boost its presence in the U.S. Overall, I would not be surprised if CRON stock is a 10-bagger in the next three to five years.
Bitfarms (BITF)
Standard Chartered believes that Bitcoin (BTC-USD) is set to quadruple by the end of 2024. Even if the cryptocurrency doubles or triples, returns in Bitcoin mining stocks can be massive. Among penny stocks with multi-bagger potential, Bitfarms (NASDAQ:BITF) looks attractive.
For year-to-date, BITF stock has surged by 317%. The rally has been backed by Bitcoin trending higher and positive business developments. As of July, Bitfarms reported a mining capacity of 5.3EH/s. On a year-on-year basis, capacity has swelled by 40%.
Besides the growth in mining capacity, there are two important points to note. First, Bitfarms reported $12,500 as the direct cost of production of one Bitcoin for Q1 2023. The low-cost Bitcoin miner is positioned for significant EBITDA margin expansion.
Further, Bitfarms has pursued aggressive deleveraging in the last 12 months. As of July, the company reported debt of $13.7 million and a liquidity buffer of $41 million. With high financial flexibility, the company is positioned for aggressive growth in the next 12 to 24 months.
Solid Power (SLDP)
Solid Power (NASDAQ:SLDP) stock has corrected by 54% in the last 12 months. The high-risk stock is attractive at current levels and 10x returns will not be a big surprise in the next five years. This is assuming a scenario that the company can commercialize solid-state batteries.
There are a few positive factors to note in the company’s progress toward commercialization. First, Solid Power has strong automotive partners. In December 2022, the company agreed to license its manufacturing technology to BMW (OTCMKTS:BMWYY). Parallel research is likely to accelerate the commercialization timeline.
Further, Solid Power is likely to deliver EV cells to automotive partners in 2023 for validation testing. This is a big catalyst for stock upside and underscores the steady progress made by the company. Solid Power is also well positioned from a financial perspective with ample cash for R&D activities.
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.
