To make money in the stock market, you need to develop a strong sense for the irrational, a quality often found among cheaply priced penny stocks.
An intuitive way to find misunderstood penny stocks is by screening for profitable companies year-over-year, whose share prices have nevertheless fallen to a meaningful degree.
Using The Globe and Mail’s stock screener, I set parameters for price-to-earnings from 0.1 to 10, market capitalization of C$1 billion and under, and 52-week stock performance beginning from -90 per cent, and generated a list of 166 companies that managed to generate cash amid a tanking share price.
While many of these names have fallen for valid reasons, a choice few have not, in line with Mr. Market‘s storied manic-depressive tendencies. Here are three penny stocks from the list that I found to be trading for cheap:
Inventronics
Inventronics (TSXV:IVX) designs and manufactures enclosures for numerous industries, including telecommunications, electric distribution and energy. Based in Manitoba and active since the 1970s, the industrial stock is a classic example of a company whose boring business allows it to fly under the radar.
As a leading name in metal boxes and cabinets for utility infrastructure, which may house anything from traffic control technology to fiber optic cables and trash or recycling, the company is well established across the world as a high-quality producer and long-term partner.
Inventronics’ reputation has earned it the ability to turn a consistent profit, posting positive net income over the past five years with a high of C$2.09 million in 2022, though shareholders have not been nearly as kind, pummelling the stock with a more than 75 per cent loss year-over-year, last trading at C$0.74 per share.
Supported by considerable brand power, a focus on essential services, and the ability to self-fund growth initiatives, this company keeping your neighbourhood electrical box safe from the elements is clearly being overlooked by the broader market.
Spartan Delta
Spartan Delta (TSX:SDE), our next cheap penny stock to put on your radar, is an Alberta-based oil and gas production and development company creating shareholder value through free funds flow, which we can define as cash, minus dividends, capital and decommissioning costs.
The company’s portfolio is composed of its Deep Basin asset, which is expected to produce about 39,100 barrels of oil per day (boe/d) in 2024, and its Duvernay asset, which is expected to produce about 400 boe/d this year, across a total land package spanning more than 300,000 hectares.
Since inception in 2019, Spartan has managed to generate an astounding C$1.578 billion in adjusted funds flow, a 584 per cent return on cumulative capital employed, as well as return more than C$1.8 billion in capital to shareholders, accounting for C$10.45 per share as of February 2024, demonstrating management’s ability to deliver value despite the COVID pandemic severely dampening demand.
On the balance sheet, this translates to positive net income over the past four years, including C$47.66 million in 2020, C$334.22 million in 2021, C$681.09 million in 2022 and C$663.11 million in 2023, with proven and probable reserves of more than 250 million boe still remaining for the company to continue lining shareholder pockets.
Though the stock has given back 71.93 per cent year-over-year, reflecting the C$1.7 billion sale of Spartan’s Montney asset to Crescent Point Energy, the last 24 per cent of that drop – which occurred after post-sale 2023 guidance – feels unwarranted because the company has remained profitable to the tune of C$120 million in combined net income in the two quarters since.
Additionally, Spartan Delta expects production to fall from 53,179 boe/d in 2023 to guidance of 38,500 to 40,500 boe/d in 2024 driven by a focus on Deep Basin optimization and exploration at Duvernay.
The negative optics of the steep drop in stock price, though largely warranted, and reduced production, though aligned with long-term growth, are likely keeping most investors at bay, despite the proven efficiency of the company’s operations and its ability to self-fund a path towards more value-accretive acquisitions or organic growth. The stage is clear for value hunters to assess and potentially capitalize.
Sucro
Our final cheap penny stock pick is Sucro (TSXV:SUG), established in 2014, a growth-oriented sugar company active in South America, North America, Mexico and the Caribbean that serves 10 of the top 20 largest global food companies (as of December 2023), and boasts an estimated 18-25 per cent share of the U.S. organic sugar market.
The company’s refineries in Hamilton, Ontario, and Lackawanna, New York, benefit from a low cost of between US$160,000 to US$210,000 per thousand metric tonnes, and can accommodate about 340,000 metric tonnes in combined capacity per year, with a planned 1 million metric tonne expansion through an additional facility in Ontario planned for 2025.
Guided by 77 per cent insider ownership (68 per cent attributable to the CEO), management has efficiently delivered on Sucro’s growth ambitions across numerous metrics from 2021 to 2023, as highlighted by:
- An EBITDA compound annual growth rate (CAGR) of more than 50 per cent from 2021-2023
- Net income of US$18.41 million in 2021, US$37.72 million in 2022 and US$16.80 million in 2023
- Revenue growth of 83 per cent from US$270.19 million in 2021 to US$496.83 million in 2023
- Refinery volume growth of 275 per cent from 40,000 to 150,000 metric tonnes per year, with a jump to 250,000 tonnes expected in 2024
Sucro is forecasting material growth in refinery production volumes over the next few years as it expands its sourcing, refining and distribution infrastructure, supported by self-generated cash and an ongoing 15-year U.S. sugar market tailwind (slide 6), positioning investors to harvest long-term upside by building a position today.
Perplexingly, despite Sucro’s value-creation track record, shares have tanked by 38.1 per cent since listing on the TSXV in October 2023, last trading at C$6.50 per share, just C$1.50 above the accepted C$5 penny stock threshold.
Parting proviso
Before you invest in one of these cheap penny stocks, or others that catch your fancy from the screener, make sure to run them through your personal due diligence process to ensure they align with your financial goals, risk tolerance and current financial situation.
While recent profitability and a discounted stock price make for an enticing green flag towards a prospective investment, the combination alone isn’t sufficient to merit your money.
Join the discussion: Find out what everybody’s saying about these cheap penny stocks on the Inventronics Ltd., Spartan Delta Corp. and Sucro Ltd. Bullboards, and check out the rest of Stockhouse’s stock forums and message boards.
The material provided in this article is for information only and should not be treated as investment advice. For full disclaimer information, please click here.
