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There is a phenomenal amount of money to be made investing in penny stocks, but it takes a bit of know-how.
The trick is to avoid the dead and dying, sidestep the overhyped fraudsters, and find real companies with real growth potential.
We want to look for companies that can turn into high-growth superstars, not penny stocks trending on social media.
One of the best ways to find the best penny stocks is to look for companies that have fallen to low levels because of sector or economic weakness.
Remember, after the Internet bubble blew up in the 1990s, many great tech stocks, including Booking Holdings Inc. (NASDAQ: BKNG), Amazon.com Inc. (NASDAQ: AMZN), and others, were or were close to qualifying as penny stocks.
Homebuilders, auto companies, and other profitable companies can fall into penny stock status thanks to events like the coronavirus. When the economy improves, they quickly climb out of the small stock universe, giving shareholders big-time gains.
This week, I dug into the penny stock universe to find these gems just waiting to bounce higher.
I found one potential growth superstar, one cyclical play that can soar when its sector improves, and one economically sensitive company that can rise five times the current price or more when we have a vaccine or effective treatment for the coronavirus.
They are all real businesses with real potential for massive returns.
This AI Penny Stock Is Our Growth Play
Our potential super growth stock is Rekor Systems Inc. (NASDAQ: REKR). Rekor makes vehicle identification and management systems in the United States and worldwide based on artificial intelligence. Their vehicle identification system is being used by law enforcement to prevent, interrupt, and solve crimes. In recent months Rekor has signed contracts with the U.S. Department of Defense and several police departments to use their software.
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Rekor has been signing partnerships with other companies to expand its breakthrough AI-driven vehicle recognition program. They recently signed a deal with Mesa Technologies LLC ("Mesa"). Today, they announced a five-year non-exclusive licensing agreement to use Rekor's intellectual property as part of a school-bus stop-arm system. Mesa has installed over 3,000 photo enforcement systems worldwide. According to the National Association of State Directors of Pupil Transportation Services, the partnership aims to increase student safety, as more than 95,000 motorists run school bus stop-arms each day.
Rekor also announced a deal with Cygnet Infotech - a premier product engineering and application development services firm - and affiliates of Cygnet to launch a standalone company to be named ROKER. ROKOR will automate parking enforcement and enable higher revenue recovery for public safety institutions and private businesses alike. Rekor and Cygnet contribute their technology in exchange for equity in ROKER, with Rekor receiving 50% of the venture.
Rekor reported 60% revenue growth last quarter, and earnings are expected to show a triple-digit increase over the next year. This could become a great growth stock on its own, or it could end up being acquired at a massive premium to the current price by a software and security company that wants to add this technology to its portfolio.
Either outcome delivers huge profits to us.
This Top Penny Stock Has 5X Growth Potential
Select Energy Services Inc. (NASDAQ: WTTR) provides water management and chemical solutions to the onshore oil and natural gas industry. Their customers are companies that use fracking to produce oil and gas.
It has been a fantastic business, but fracking is at a standstill right now amidst price volatility in the energy markets. The pandemic has reduced demand, and several of the most prominent players in global energy markets (notably the Saudis and Russians) have torpedoed the market on several occasions in 2020.
The business was okay during the first quarter, and Select Energy produced positive cash flows amidst a complex environment. Given the economic slowdown and demand reduction caused by the spread of COVID-19, Select Energy CEO Holli Ladhani and her team took aggressive cost-cutting steps, including reducing the headcount by 50% and renegotiating some of the fixed costs. Altogether, these steps reduced costs by 40% or $30 million. This dramatically improves Select Energy's ability to hold on until oil and gas prices recover.
Select Energy has $114 million of cash and $300 million in total liquidity and no bank debt, so they are in excellent financial condition and should weather the storm.
When firmer pricing returns to the oil and gas industry, we could see this stock rise by at least five times the current price. That's right where it was in 2018.
The Best Penny Stock for a Bounce-Back Play
No industry has suffered more from the coronavirus than airlines.
The pandemic did not spare Mesa Air Group Inc. (NASDAQ: MESA) out of Phoenix. Mesa provides regional air carrier services under capacity purchase agreements with American Airlines and United Airlines. Those agreements have seen a massive reduction in demand since the coronavirus arrived in the United States, and Mesa has seen about a 70% drop in total flights.
That won't change until we see a vaccine or effective treatment for COVID-19. The good news is that COVID-19 is not the first virus the world has tackled, and it probably won't be the last. This will pass, and airlines will return to a version of normality.
In the meantime, Mesa has gone into the cargo business.
This month they announced plans to provide air cargo service for DHL Express with Boeing 737-400F cargo aircraft. Under the agreement, Mesa will operate two cargo aircraft from DHL Express Americas global hub at Cincinnati/Northern Kentucky International Airport for a five-year term. The company will lease the aircraft from DHL with the first scheduled to be in service this October.
Mesa's earnings are expected to increase by almost 10-fold in 2021. If the analysts are even close to right, the stock could soar by four to five times the current quote in less than 18 months.
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