Within the penny stocks space, there seem to be a lot of stories that can do 5x or 10x in the coming years. However, not all stocks fire and exposure to penny stocks involves high risk. Having said that, I would not shy away from holding a few penny stocks in my portfolio. If multibagger returns come, the health of the entire portfolio changes. That is, even if the allocation to penny stocks is 10% of the total portfolio.
This column discusses three high-conviction stories that are likely to deliver five-bagger returns within the next 24 months. My focus is on companies with good fundamentals or a strong asset base. Therefore, these are typically non-speculative penny stocks.
Further, I have focused on industries with positive tailwinds. The company growth factor, coupled with the industry outlook, will magnify returns.
Let’s discuss the specifics that make these companies attractive.
Bitfarms (BITF)
In my list of penny stocks with catalysts, Bitfarms (NASDAQ:BITF) is a high-conviction pick for multibagger returns. BITF stock trading at $1.44 does not reflect the fundamentals and the growth catalysts.
First, Bitcoin (BTC-USD) is trending higher, and I am bullish on the cryptocurrency for 2024. A rally for Bitcoin usually follows the halving event. Additionally, the potential introduction of spot Bitcoin ETF can trigger a big rally. Bitfarms is well positioned for revenue growth and cash flow upside as a Bitcoin miner.
Further, Bitfarms has robust fundamentals and has some massive hash rate capacity expansion plans. As of Q3 2023, the company reported cash and digital assets of $73 million. The recent financing has boosted the cash buffer to $117 million.
The cash will be utilized for aggressive expansion. As of November, Bitfarms reported a hash rate capacity of 6.3EH/s. It’s expected that capacity will increase to 17EH/s by the second half of 2024. This will translate into robust cash flow upside if Bitcoin remains in an uptrend.
Standard Lithium (SLI)
Standard Lithium (NYSE:SLI) has a market valuation of $380 million. If the Company were to be valued based on the net present value of assets, SLI stock would be 10x from current levels.
The Company’s flagship Lanxess project is the most advanced lithium brine project in the United States. The project alone has a net present value of $4.5 billion. If we add other projects, the company’s assets have an NPV in the range of $5 billion to $6 billion.
There are two reasons for SLI stock trading at a depressed valuation. First, lithium has corrected sharply in 2023, and industry sentiments for the near term are weak. Further, Standard Lithium would require significant funding infusion to accelerate the game-changing project. Once the funding is secured and there is clarity on the project execution timeline, I expect SLI stock to skyrocket. I must add here that a significant lithium supply gap is expected over the next 10 years. Once sentiments reverse for lithium, the upside potential for the stock will be revised higher.
IAMGOLD Corporation (IAG)
IAMGOLD Corporation (NYSE:IAG) is another quality penny stock to buy with a catalyst for a significant rally. The first bullish trigger is the fact that gold has seen a breakout above $2,000 an ounce. With expectations of a rate cut next year, I believe that gold will continue to trend higher. This would imply revenue and cash flow growth.
From a financial perspective, IAMGOLD reported an operating cash flow of $37.5 million for Q3 2023. This implies an annualized cash flow potential of $150 million. I, however, expect a significant bum-up in OCF next year. This is the key reason to be bullish on IAG stock that trades at undervalued levels.
There are two reasons for expecting a strong cash flow upside. First, realized gold prices are likely to be higher, with the precious metal at $2,050 an ounce. Further, the Company expects the Cote gold mine to commence production in early 2024. Between years one and six, the mine has an annual production capacity of 495,000oz. Stellar growth is on the cards, translating into a big rally.
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.
