Don’t Waste Money on Penny Stocks — These 3 Companies Are Better Buys

Since the S&P 500 bottomed out last March, it has gone up more than 70%. Many individual stocks are doing even better with some returning 100%, 500%, or more than 1,000%. Missing out on those kinds of gains can hurt, and it unfortunately increases the coppery gleam of risky penny stocks.

Penny stocks typically trade under $5 per share and have very small market capitalizations. Investors believe their dollars stretch further since they can buy more shares. Even going up just a few bucks can lead to big-time returns — at least that’s the thought process.

But penny stocks are vulnerable to pump-and-dump schemes, leaving the bag in your unsuspecting hands. You could wait it out, but penny stock companies often have poor long-term prospects, exacerbating your losses over time.

For these reasons, I hope you stay away from most penny stocks. But don’t lament your fleeting fortunes: These three stocks can still pad your pockets over the long haul. And they’re even penny-themed picks.

eBay: A platform for buying pennies … and a lot of other things

Online marketplace eBay (NASDAQ:EBAY) allows users to buy and sell almost anything, even rare pennies that sell for thousands of dollars. But the company doesn’t provide the merchandise. It simply provides the platform, resulting in a stellar 77% gross profit margin. But while that’s impressive, the company’s 183 million active buyers are what truly make this an interesting company.

Many investors overlook eBay because it has reported low growth in recent years. However, the company’s revenue was boosted by the pandemic: up almost 16% year over year through the first three quarters of 2020. But for some time, eBay has been a low-growth company, and yet, tens of millions continue to peruse its listings, a testament to its ongoing top-of-mind brand awareness.

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And this intangible asset provides eBay with tangible growth opportunities. For example, the company began letting sellers advertise their listings. In the third quarter alone, these promoted listings accounted for 7% of total revenue, surging 79% year over year.

Moreover, the company recently returned to the payments space. In the last few months, hundreds of thousands of sellers have started using eBay’s managed payments, which means investors should start seeing the long-term potential in coming quarters.

And eBay also started a used-merchandise authentication business, which it believes will deliver strong growth for years to come.

Because of its strong user base, the company has been able to identify these new monetization opportunities. With its stock trading at less than 16 times forward earnings, I don’t believe the market is pricing in this growth potential. It could take some time to play out, but fortunately, eBay will pay you a low-yield (but growing) dividend while you wait.

A hand lifts a penny off of a stack of pennies.

Image source: Getty Images.

Monster: When penny stocks go right

In rare cases, penny stocks can work out well long term, as is the case with Monster Beverage (NASDAQ:MNST). In Jan. 2004, the company had a market cap of just $70 million and a price per share around $0.12. Since then, Monster stock is up more than 60,000%. Despite concerns from the general public regarding the safety of energy drinks, and despite competitors with deeper pockets, this beverage company has done nothing but grow sales for 28 consecutive years.

Monster was a rare penny-stock success thanks to a smooth move from management. Before its success, the company was called Hansen’s Natural, an underperforming beverage outfit selling juices and sodas. But management noticed the impressive growth of newcomer Red Bull in the budding energy-drink market, and they created Monster to compete. Fortunately, Hansen’s already had experience in the beverage industry and had distribution agreements in place. These advantages helped Monster at launch, and it would go on to take market share.

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Listen clearly: I don’t expect Monster stock to return 60,000% over the next 17 years, as it did in the past 17 years, but it can still be a steady performer. Here are a few reasons to like it.

First, its broad beverage portfolio ensures it can adjust to new trends as they emerge, like how Monster’s new drink Reign appeals to the growing fitness-energy trend. Second, only about 36% of net sales are from outside the U.S., suggesting a long growth runway overseas. And third, Monster has zero debt, almost $1.7 billion in cash and short-term investments, and is currently generating over $1 billion in annual net income, giving it an enviably solid financial position.

An online store powered by Square.

Image source: Square.

Square: Earning pennies but creating fortunes

Finally, fintech company Square (NYSE:SQ) turned a profit in the third quarter of 2020 — a whole seven pennies per diluted share — but don’t let those meager profits fool you. The company is spending heavily on product development and sales and marketing in an effort to disrupt the entire financial industry.

There are two major sides to Square’s business. The first is the Cash App: fintech solutions for individuals. As cash took a backseat during the pandemic, this business soared. Cash App revenue was up 574% in the third quarter alone. However, a lot of this was growth was driven by things that don’t carry good profit margins. That said, high-margin subscription and service-based revenue was still up an impressive 154% year over year for Cash App in the third quarter.

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The other side of Square’s business is the seller side, which has struggled during the COVID-19 pandemic. Through the first three quarters of 2020, seller segment revenue was up less than 1% year over year. It’s understandable — many of the small and medium-size businesses Square serves were disproportionately affected by the coronavirus. But this might be an opportunity for 2021 as life returns to normal. Square played a big role in helping businesses endure. For example, its services help brick-and-mortar stores merge in-store inventory with an online presence. I’m betting business owners increasingly see that it pays to be prepared with services like those offered by Square. 

As the business grows, it will keep plowing cash into new ancillary opportunities. For example, the company is rumored to be interested in acquiring music-streaming company Tidal. Therefore, expect pennies on the bottom line for the foreseeable future while it pursues any opportunity it can to grow its overall business.

Conclusion

The point is you don’t need to plow hard-earned cash into sketchy businesses with uncertain prospects. eBay, Monster, and Square are all safer bets than most penny stocks. And they can beat the market average over the long haul.

That last point is important, because you don’t need exponential gains to create long-term wealth. Simply beating market returns over the course of decades with safe stocks like these will get you there.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.


View more information: https://www.fool.com/investing/2021/01/30/dont-waste-money-on-penny-stocks-3-better-buys/

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