Given the recent market volatility, many traders are trying to make money in penny stocks. With low prices and elevated volatility, penny stocks could be a great way for traders to cash in on breaking news and rapid changes in market sentiment.
However, with the seemingly weakening economic and political backdrop, this is a risky time to be owning most penny stocks. After all, firms normally end up with a rock-bottom share price because something has gone dramatically wrong with their business model.
It’s not the leading growth enterprises or blue-chip firms that trade at penny stock prices. Rather, they are companies that are struggling to generate revenues, achieve profitability or have massive debts.
With economic problems mounting, it could be a challenging time for penny stocks. These are seven that you don’t want to get stuck holding before the market potentially heads much lower.
Tilray Brands (TLRY)
The cannabis sector enjoyed a sharp upswing in sentiment earlier this year. There were rumors that there would be major changes in U.S. government regulation towards marijuana. The speculation was that the Biden Administration would make a major policy announcement around cannabis on April 20th. However, this didn’t happen, disappointing cannabis investors, and led to a reversal in sentiment.
Tilray Brands (NASDAQ:TLRY) investors were looking for a boost. If positive news had come out about cannabis reclassification, that could have been a game changer for TLRY.
But with that catalyst failing to occur, the situation is bleak. Tilray Brands has been experimenting for years trying to find a viable business model. It’s tried everything; recreational cannabis, medical marijuana, international markets, and more recently it’s gotten into craft beers and adult beverages. Simply put, Tilray Brands has been throwing spaghetti at the wall, but nothing has stuck.
To keep running the company despite massive losses, TLRY has engaged in seemingly never-ending shareholder dilution. Even with the stock at such a low price today, the company still has a market capitalization of more than $1.3 billion. This is a grossly excessive figure, given the firm’s unsuccessful track record and questionable forward prospects.
Clear Channel Outdoors (CCO)
Clear Channel Outdoors (NYSE:CCO) is a company that owns and manages billboards. Traditionally, these have been billboards positioned along highways. However, in recent years, Clear Channel Outdoors has gotten into digital billboards, experiential advertising and even augmented reality (AR) offerings.
In fact, billboards are a reasonably attractive business model. And historically, people have made good money owning these assets. The issue here is that Clear Channel Outdoors has levered up its business with a tremendous amount of debt. Unfortunately, its billboards haven’t been able to generate enough revenues to reliably profit given its debt load.
Furthermore, the company has a book value of -$7.17 per share. That’s rather remarkable given that the stock price is just $1.39. This speaks to just how underwater Clear Channel Outdoors’ balance sheet is right now.
In a time of zero interest rates, CCO could keep its business afloat through low-cost debt as interest expenses were manageable. But higher interest rates tend to demolish this sort of highly levered business model. That’s particularly true as billboards are a steady-state business where revenue growth tends to be modest at best. Meanwhile, a recession or economic downturn in which clients pull back on advertising could sink Clear Channel Outdoors entirely.
Nikola (NKLA)
Nikola (NASDAQ:NKLA) is the electric vehicle (EV) maker most known for its infamous stunt. It rolled a prototype vehicle down a hill to give the appearance of having a successful working unit.
The company has sought to move past that unfortunate stage of its history. Nikola founder Trevor Milton has long since left the company and prosecutors successfully charged him with fraud.
Under new management, Nikola built a factory in Arizona and is attempting to make it a legitimate EV company. However, the economics simply don’t seem to be working out for Nikola. It has been marked by setbacks such as a production pause in May 2023.
With a balance sheet in dire condition, there simply doesn’t seem to be the commercial adoption necessary to drive any sort of near-term turnaround.
With the stock at 62 cents per share and the company’s balance sheet in such poor state, it’s increasingly unclear if investors will continue with Nikola. And when the cash runs out, it’s hard to see NKLA stock retaining value for shareholders.
Oatly (OTLY)
Oatly (NASDAQ:OTLY) is a packaged food company attempting to make a splash in the better-for-you beverages space.
Its namesake product, Oatly, is an oat-based drink which serves as an alternative to cow’s milk. The company enjoyed some initial high profile success getting chains such Starbucks to offer Oatly as an option for customers’ beverages.
However, the company failed to gain traction, and revenue growth has tapered off, now being in the single digits. And analysts expect earnings to remain negative through at least the end of 2026.
Oatly has run outsized sales and marketing expenses in proportion to its revenues. While it has marketed heavily, people just aren’t that interested in Oatly. That could be due to a highly competitive market. Consumers can choose from rice milk, soy milk, coconut milk and almond milk among the broad range of dairy alternatives. Within oat milk alone, plenty of rival products and store brand alternatives strive for the top spot.
It seems like oat milk may be a commodity product that should have low profit margins. In any case, Oatly has failed to demonstrate much consumer loyalty. Given the company’s large operating losses, thin balance sheet and the current market sentiment against unprofitable firms, the investment case for Oatly has gone sour.
Bigbear.ai (BBAI)
I’ve been highly critical of technology company Bigbear.ai (NYSE:BBAI) in the past. Readers might wonder if the sharp drop in BBAI stock over the past month has changed my outlook. The answer is – not at all.
While Bigbear.ai has now fallen back to penny stock territory, it has plenty more downside ahead. In fact, judging by its book value of -$0.43 per share, one could reasonably debate whether the company has any underlying long-term value at all.
Like many firms, Bigbear.ai went public via SPAC a few years ago to cash in on lofty investor sentiment. BBAI shares quickly collapsed following the SPAC deal, but were brought back to life with the surge and interest around generative artificial intelligence (AI).
Generative AI is certainly exciting. However, it seemingly carries little relevance to Bigbear.ai’s business. It is more focused on data analytics applied to industrial automation and predictive analytics.
Unfortunately, Bigbear.ai isn’t growing quickly. In fact, it grew revenues a paltry 0.5% last quarter. It runs large operating losses. Also, insiders are selling millions of BBAI shares, with especially aggressive activity noted in March.
Finally, Bigbear.ai has a negative net worth based on book value, revenues have stalled out, operating losses are large and insiders are selling. This adds up to an easy avoid on BBAI stock going forward.
Virgin Galactic (SPCE)
Speaking of failed SPACs, how about Virgin Galactic (NYSE:SPCE)? Richard Branson’s operation initially blasted off as traders warmed up to the idea of space tourism as a viable business model.
Let’s be clear, I’m not knocking the idea of space tourism being a relevant business in due time.
However, Virgin Galactic is offering something that might be well short of what customers consider to be real space tourism. Rather, it has brief zero-gravity flights in which people escape atmosphere for only a few minutes before returning to Earth.
Short sellers have suggested that what Virgin Galactic is offering is not a particularly appealing product and will have limited commercial uptake.
And that’s if the company ever makes it to the launchpad in the first place. Recently, the company slashed its workforce. And now it’s suspending commercial operations until at least 2026 as it attempts to develop a better flight vehicle. Given all these factors, SPCE stock seems exceptionally risky as the broader stock market heads into choppy waters.
Purple Innovation (PRPL)
Purple Innovation (NASDAQ:PRPL) is a direct-to-consumer company focused on the home furnishings market. Specifically, it claims to have best-in-class mattresses.
Purple Innovation can build a better mouse trap by selling mattresses and related items online straight to customers rather than spending money on retail distribution. Instead of giving up margin to a brick-and-mortar store, Purple Innovation could earn a fortune by cutting out the middleman.
In theory, that makes sense. In practice, this hasn’t worked out. The market was absolutely flooded during the pandemic with direct-to-consumer e-commerce brands. Venture capitalists spent vast sums of money fostering these business models.
Some of them have ultimately worked out, but most failed to meet expectations. The category has become exceedingly competitive. Specifically in mattresses, Purple Innovation isn’t the only company with an e-commerce play, either.
Additionally, advertising rates for online social media, paid search, podcasts and other such marketing channels for these direct-to-consumer companies have soared. As the cost to acquire new customers rises, it challenges the underlying viability of the direct-to-consumer model.
And so, Purple Innovations lost more than $100 million over the past 12 months on revenues of nearly $500 million. Needless to say, that’s an underwhelming result during a strong economic expansion. That’s doubly true as the past couple of years have been a tremendous time for home goods purveyors. Consumers have been flushed with cash and spending liberally on furniture such as beds and mattresses.
If Purple Innovations couldn’t make money during the prior boom, it’s almost certainly not going to fare better during an economic bust. Higher interest rates and a retrenchment in consumer spending could be the final straw for this struggling e-commerce play.
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, Ian Bezek did not have (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.
Artificial Intelligence, Automotive, Healthcare, Cannabis, Consumer Discretionary, Consumer Staples, Electric Vehicles, Food, Industrial, Retail, Software, Space, Technology
