One of the best techniques for finding penny stocks to buy is finding industries experiencing tremendous growth.
By pinpointing these explosive areas, investors can find small companies - and cheap stocks - that are poised to break out.
These penny stocks are also different than the riskier cheap plays that trap investors. They're headed higher because they are solid companies focused on emerging industries - and won't stay "penny stocks" for long.
These three picks are especially good picks because they stand to ride the growth of not one but two surging tech industries.
The first industry: semiconductors.
Time to Play the $78 Billion-a-Quarter Semiconductor Industry
Money Morning experts love the semiconductor industry, which - as measured by the SPDR S&P Semiconductor ETF (NYSE Arca: XSD) - isup 22% so far in 2014.
The main reason for the sector's success and bright future can be found in almost every consumer's pocket or purse.
"Smartphones may be the main catalyst behind this semiconductor boom," Money Morning's Defense and Tech Specialist Michael Robinson said. "While your personal experience may lead you to believe the smartphone market is mature, these devices, which use an array of chips for processing, cameras, and power management, will continue to see big sales numbers for years to come."
According to the International Data Corporation (IDC), more than 1 billion smartphones were purchased globally in 2013. That number is expected to jump 70% to 1.68 billion by 2017.
The Semiconductor Industry Association (SIA) has recently reported that worldwide sales of semiconductors reached $78.47 billion during the first quarter of 2014 - the highest-ever total for the first three months of a year.
"This really isn't a surprise, since semiconductors have become central elements of almost every device we use," Money Morning's Executive Editor Bill Patalon said. "You'll find them in LEDs, smartphones, Wi-Fi routers, tablets, gaming consoles, digital camcorders, and new cars and trucks."
But that's just the tip of the iceberg for these devices and the companies that produce them - because the emergence of wearable technology devices is creating even better profit potential for semiconductor stocks...
Wearable Tech's Explosive Growth Potential
Just like smartphones and tablets require numerous semiconductor products and microchips, so too do wearable tech products. That's great news for semiconductor companies because the wearable tech field is about to take off.
In February, the research firm Canalys claimed wearable tech will become a "key consumer technology" by the end of 2014. At the same time, the firm also predicted that the smart wristband segment alone will grow from 8 million in 2014 to 23 million in 2015. That number is expected to reach 45 million in 2017.
Another study from Juniper Research in late 2013 reported that retail revenue from the wearable technology market will grow from $1.4 billion in 2013 to $19 billion in 2018.
"The tech forecasters at IDC say the wearables market will grow at a compounded annual rate of 78% for the next several years," Robinson said. "That means it will double roughly every 11 months."
One of the best ways to play these industries is with a few select penny stocks. Major tech companies like Apple Inc. (Nasdaq: AAPL) and Google Inc. (Nasdaq: GOOG, GOOGL) will always be at the forefront of growing tech industries - but their stock is more expensive per share than smaller companies that are off Wall Street's radar. Since these players are lesser known, investors have a chance to buy in before they potentially become household names - and share prices soar.
And thanks to their smaller size, these companies can expand at a much faster rate than mega-cap corporations.
Here are three penny stocks that are poised to ride these sectors' tremendous momentum...
Three Semiconductor Penny Stocks to Buy Now
Advanced Micro Devices Inc. (NYSE: AMD) is a global semiconductor company that develops microprocessors and chips that are used in a variety of tech products including mobile devices. AMD shares currently trade at $4.53 and have climbed 20% in the last three months.
AMD has beaten earnings projections for four consecutive quarters and is expected to report EPS of $0.02 per share this quarter, which is up from a loss of $0.09 this time last year. The company is also expected to report a revenue increase of 24% this quarter.
Another good sign for AMD stock is its 0.60 price/earnings to growth (PEG) ratio.
"The PEG ratio measures the firm's P/E against its project growth rates. A PEG ratio of 1.0 is considered 'fair value.' Less than that is viewed as a discount ... a bargain," Robinson said.
Zacks Investment Research currently rates AMD stock as a "No.1 Strong Buy," which is the highest rating the company provides.
Entropic Communications Inc. (Nasdaq: ENTR) is a semiconductor company that provides solutions for connected home entertainment. According to the company, it "transforms how traditional broadcast and IP streaming video is seamlessly, reliably, and securely delivered, processed, and distributed into and throughout the home."
While ENTR stock's current value of $3.25 is near the bottom of the company's 52-week range of $3.05 to $5.12, eight analysts recently polled by Thomson/First Call have an average price target of $4.20 for the stock. That's a 29% gain from today's price.
Admittedly, 2014 hasn't been the best year for ENTR stock, but 2015 is looking brighter. Revenue estimates show a near 12% gain for 2015. The company is undergoing some heavy restructuring that should drive profitability next year.
United Microelectronic Corp. (NYSE ADR: UMC) is a semiconductor foundry company that develops wafers and other products used in the production of circuits and other microdevices.
UMC shares trade at $2.49 currently, and have already jumped 22% in 2014. In the last three months alone, UMC shares are up almost 18%. UMC has either beaten or matched earnings estimates for four consecutive quarters.
Revenue growth looks good for UMC. Analysts project that the company will post 10% revenue growth and 7.8% revenue growth in 2015. In its upcoming earnings statement, consensus estimates expect UMC to beat last year's revenue by 11.4%. The firm's PEG ratio is also below 1 currently, at 0.9.
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