How to make sense of the markets these days? Starting two months ago, we entered the steepest, fasted bear market slide in modern history – only to have stocks turn around for a sustained rally that has lasted over 4 weeks now. The volatility comes from the economic impact of the various ‘social distancing’ policies put in place to combat the COVID-19 pandemic. These measures, mainly stay-at-home orders; societal lockdowns; and severe trade and travel restrictions, have brought economic activity to near-halt in much of the world.
The normal signals are not working. First quarter earnings season is on us, and investors are watching closely, hoping to get a clear idea of just how bad the COVID-19 damage has been. It’s not a question of ‘Will there be earnings losses,’ but rather, ‘How bad will the earnings losses be?’ In the words of Heritage Capital President Paul Schatz, “The panic maybe over in grand form, but I’ll argue that we’re going to see more panic-days in the next four to six weeks.”
Longer-term, however, Schatz is more optimistic. He believes the Dow may reach 40,000 next year, and says, “There’s plenty of opportunities in companies and sectors that have not ripped already.”
Opportunity is the key word – and sometimes the hardest thing for investors to see. To find names that can deliver solid returns and now come with a bargain price tag, investors will often turn to penny stocks, or those trading for less than $5 per share.
Sure, there could be a very good reason these tickers are so affordable, but should there be even minor share price appreciation, massive percentage gains could materialize, along with hefty profits for investors.
Bearing this in mind, we pulled up the database from TipRanks to find some clear opportunities – stocks with penny-ante entry points, but the potential to soar my more than 100%.
Motus Gi Holdings (MOTS)
First on our list is a company in the medical technology sector, where high upside potential is common – especially for companies with a marketable product and path to approval by the medical regulators. Motus operates in the gastroenterology field, developing methods and solutions to improve GI endoscopy procedures and outcomes. The company’s chief product, Pure-Vu, facilitates the clearing and cleaning of the colon during colonoscopy procedures, allowing practitioners to better view the intestine and making biopsies cleaner and safer. Pure-Vu has been cleared by the FDA, and with 1.5 million in-patient colonoscopies performed annually in the US, Motus sees an enormous potential market.
This company’s sound performance convinced 5-star analyst Yi Chen, of H. C. Wainwright, to initiate coverage of the stock with a Buy rating. The analyst describes Motus as “A simple, straightforward story in gastroenterology,” and sets a price target of $3, suggesting at sky-high 317% upside potential. (To watch Yi Chen’s track record, click here)
In longer comments, Yi Chen says of the company’s market potential, “We note that one of the most attractive aspects of the Motus GI business proposition is the fact that CRC screening is being recommended at earlier and earlier ages in the U.S., while such screening is required to a progressively greater extent as people age—thus, demographic changes in developed economies as these populations age should increase demand for use of the Pure-Vu System.”
“We believe Motus GI’s platform should see broad deployment within the GI niche over the coming years. The Pure-Vu System has received 510(k) authorization in the U.S. from the FDA and holds CE Mark designation in Europe. In addition, the Israeli Ministry of Health has cleared the GEN2 version of the system for sale in the State of Israel,” the analyst concluded.
Wall Street clearly agrees with Yi Chen. The analyst consensus on MOTS is unanimous, with 5 Buy ratings combining to give the stock a Strong Buy consensus view. Shares are currently priced at a bargain-basement 72 cents – but the market potential noted above is clear, and the average price target here, $4.30, represents a 497% growth potential for the next 12 months. (See Motus Gi stock analysis on TipRanks)
Sierra Metals, Inc. (SMTS)
When you talk about metals, most people think first of gold. The yellow metal has long been used as a store of value, and even today we speak of ownership in a strong asset – any strong asset – as having a ‘gold mine.’ But gold is not the only metal, precious or base, that bring profits for investors. Silver has also long been used as a precious metal, and has widespread industrial uses as well. Copper, lead, and zinc are base metals, highly sought after by a variety of industries.
Sierra Metals, the second stock on our list, is a small-cap mining company in Latin America. Sierra has two mines in Mexico and one in Peru, and is a major producer of copper, lead, and zinc, and also produces small quantities of silver and gold. Despite COVID-19 disruptions, the company was able to show production increases in Q1 2020, reporting 21.6 million pounds of zinc, 11.8 million pounds of copper, 9.1 million points lead, 900,000 ounces of silver, and over 3,600 ounces of gold brought to light. The largest increase was in gold production, which is up 84% year-over-year.
Sierra’s production numbers come even as the company has had to cut back on Mexican operations in response to the government’s shutdown decrees. The company expects that its mines will be able to continue expanding production this year, but has suspended its 2020 guidance pending review. The preliminary Q1 production numbers are taken as a good sign.
Slack demand from industry has pushed down base metal prices but according to Roth Capital analyst Jake Selesky, Sierra Metals should be able to withstand the pressure. He writes, “…the company exited 2019 with a healthy $42.9 million in cash and no current debt obligations. Due to this, we believe SMTS is in a strong position to weather to downturn in base metals prices and remains significantly undervalued at current levels.”
Selesky reiterated his Buy rating on SMTS shares, and set a $3.50 price target that shows his confidence in a 337% upside. (To watch Selesky’s track record, click here)
The Strong Buy analyst consensus here is another unanimous verdict, based on 3 Buy ratings. Shares are selling for just 80 cents each, but Wall Street believes that this stock has a clear path forward – the average price target is $3.08, and suggests a 285% upside potential. (See Sierra Metals stock analysis on TipRanks)
Drive Shack, Inc. (DS)
Last on our list is a company in the leisure industry. Drive Shack started out operating golf courses at country clubs. Before the coronavirus craziness, the company had started shifting its focus, moving from golf courses to golf entertainment, combining driving bays with restaurant and bar facilities. With the lockdown in place now, business has stopped – but government, at the Federal level as well as in several states, is starting to openly discuss easing restrictions.
The company saw Q4 earnings, while still registering a net loss, improve significantly over the year before – the net loss fell from 12 cents to 6 cents. The shutdowns in Q1, in response to COVID-19, are making the current quarter’s forecast grim. But Drive Shack is hoping to get back on track in 2H20. The company plans to reopen as soon as possible after restrictions are lifted, and it is not unreasonable to assume that there will be a pent-up consumer demand for recreational activities.
BTIG analyst Peter Saleh, rated 5-stars by TipRanks, believes this is the most likely scenario. In a note titled, “Expect Eatertainment to Thrive Once Health Concerns Pass,” Saleh writes of Drive Shack, “We believe consumers are gravitating towards multi-purpose entertainment venues similar to what the company is developing. We are mindful of the potential impact from the coronavirus outbreak but expect this will eventually pass and believe shares have already discounted this.”
In line with his long-term optimism, Saleh has initiated coverage of DS shares with a Buy rating. Taking the pandemic effects into account, he gives the stock a $3 price target, which implies an upside potential of 158%. (To watch Saleh’s track record, click here)
Looking at the consensus breakdown, only one other analyst has thrown an opinion into the mix. However, the rating was also bullish, making the Street consensus a Moderate Buy. Meanwhile, the $5.50 average price target suggests huge upside potential of 374%. (See Drive Shack stock analysis on TipRanks)
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