Penny stocks are a horrible investment. Selling for less than $1 per share, penny stocks are cheap for a reason. Many of the companies don’t even have a product or service consumers can buy. Instead, they try to lure investors in with a story about how big they can get one day.
The appeal of penny stocks is understandable, though. Controlling only a handful of shares can make you a killing if the stock moves higher by just a few pennies. Unfortunately, that rarely happens, and most investors who buy penny stocks don’t ever see that return. They end up getting slaughtered. Penny stocks are a playground ripe for manipulation, fraud and pump-and-dump schemes.
Yet the Securities & Exchange Commission classifies any stock selling under $5 per share as a “penny stock.” That gives us more leeway to find a real business. By pulling back our lens, we can find businesses offering products and services that consumers want to buy and still represent an opportunity for growth.
Below are three undervalued penny stocks to buy in May before the market catches onto their bargain-basement pricing.
Iamgold (IAG)
At around $2,380 an ounce, gold is trading near its all-time high. The yellow metal has been on a tear for five years, doubling in value. Canadian gold miner Iamgold (NYSE:IAG) hasn’t had as long of a run of good fortune, but this year shares are up 76% to around $4.50 per share. They could go higher.
Iamgold completed its first gold pour at the Cote gold mine in Ontario as it nears its commissioning date. When in full production, Cote could be the third-largest gold mine in Canada. Iamgold expects gold production to reach 220,000 ounces to 290,000 ounces this year. Cote has a total estimated measured and indicated mineral resource of 16.5 million ounces with an additional 4.2 million ounces inferred. That would give the gold mine an estimated life expectancy of 18 years with significant growth opportunities.
Iamgold will then have three mines in operation. With global tensions rising on many fronts, expect gold prices to remain elevated and Iamgold stock to rise alongside heightened demand for the precious metal.
Tilray Brands (TLRY)
Marijuana stock Tilray Brands (NASDAQ:TLRY) has several levers it can pull to continue growing. Tilray stock is down 12% this year to $2, and shares sit 40% below their 52-week high.
The primary catalyst for growth is legalization of marijuana in Germany. Tilray is the largest cannabis stock in Germany by revenue. It might take a minute for the recreational use market to get going until regulations are adopted but Tilray already has a sales team on the ground.
That is because its Tilray Pharma distribution arm already distributes medical marijuana to 13,000 pharmacies in the country. The pot stock also has production facilities in Portugal and Canada and exports marijuana to Germany. Tilray is the best-positioned cannabis company to take advantage of this opportunity.
The potential for U.S. legalization also represents the possibility for future growth. While Tilray would likely have to make an acquisition to jumpstart operations here, with extensive experience in Canada and soon Germany, it would be a small hurdle to get over.
Petco Health & Wellness (WOOF)
Admittedly Petco Health & Wellness (NASDAQ:WOOF) hasn’t worked out as well as I anticipated when I identified it last August as a bargain stock ready to run. Apparently I was just early. While Petco stock lost 65% since then to $2.40, shares are up over 50% in the past month.
The long-term trends of the pet industry are why I chose Petco and why I am still bullish today. According to the American Pet Products Association, U.S. pet parents spent $147 billion on their four-legged fur babies in 2023, up 7.5% from the year before. Pet owners will spend another $150 billion on them this year. Of that, $64.4 billion will be food and treats, while $38.3 billion goes to veterinarian care and products.
Petco offers a wide range of pet food, products and services, including vet care, that consumers will gravitate towards. It is only dramatically underperforming the market because it is heavily weighed down with debt. Because the Federal Reserve raised interest rates at an unprecedented rate and then embarked on a higher-for-longer policy, Petco’s variable interest rate loans come at a high cost.
Inflation just inched down in April so the Federal Reserve may be more inclined to cut rates eventually. As Petco reduces its debt and becomes cheaper to finance, look for Petco to rise above its penny stock status.
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, Rich Duprey did not hold (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.