Penny stocks can be your best friend but also your worst enemy. Although individual pennies often provide lucrative returns, a diversified penny stock portfolio tends to underperform the S&P 500. Therefore, it is essential to revise your penny stock portfolio frequently.
Furthermore, fundamental aspects suggest penny stocks may end up under the pump early next year. For example, the U.S. yield curve’s longer end continues to drop faster than its short end, suggesting a recession may be en route. Moreover, U.S. credit spreads have yet to retreat after surging in September, fueling a bearish argument for high-risk assets like penny stocks.
I authored a “penny stocks to buy” article a few weeks ago on InvestorPlace. However, herein, I mention three penny stocks to sell before they detract value from your portfolio. Let’s discuss each of them.
StealthGas (GASS)
Despite being one of the world’s largest owners of LPG pressurized carriers, StealthGas (NASDAQ:GASS) stock’s market capitalization is below $300 million. placing it in penny stock territory.
GASS’ 1.3x year-to-date surge is undoubtedly impressive. However, an inflection point has emerged. Tanker shipping rates have stalled amid a slowdown in demand for oil and gas-related products in recent months. That is mainly due to a softening economic environment, which naturally dictates tanker company profitability. Even though a consumer sentiment pivot in late 2024 may occur, tanker fees are sticky, meaning they will likely overshoot to the downside before benefiting from recovering consumer sentiment.
StealthGas released its third-quarter earnings report last month, revealing $34.65 million in quarterly revenue and an earnings-per-share of 31 cents. The company’s latest results are pretty decent, especially considering its net income surged by 97% year-over-year. However, StealthGas’ fleet size dropped to 27 in its third quarter from 34 a year ago. Lower fleet size paired with a weaker shipping rate environment may lead to softer financials next year, concurrently dragging GASS stock into the abyss.
GASS stock’s price-to-earnings ratio of 4.62x looks good at face value. Yet, I think the stock is a value trap, given the current industry environment and the stock market’s risk premium outlook.
Vizsla Silver (VZLA)
Vizsla Silver (NYSE:VZLA) is a precious metals exploration company. The business has yet to achieve commercial production as it continues exploring resources in its 100%-owned Panuco silver-gold project in Sinaloa, Mexico.
The silver explorer’s technical report suggests its Panuco mining project owns indicated resources of around 104.8 million ounces and inferred resources of 114.1 million ounces. Despite its promising technical report, Vizsla has yet to deliver complete transparency about its mining roadmap and the potential profitability of its venture. Moreover, Vizsla’s continuous capital raises might discourage shareholders unless met with faster mine exploration and development. Vizsla raised CAD 73 million in private placements in 2023 alone, upping its total shares outstanding to nearly 208 million, which is an arduous amount for a small-scale miner.
Based on my back-of-napkin calculations, Vizsla has a price-to-inferred resources ratio of 2.08x and a price-to-indicated resources ratio of 2.26x. Although the multiples aren’t bad, I’m concerned about the company’s frequent capital raises and lack of mine completion transparency. As such, I deem this penny stock a strong sell.
PetMed Express (PETS)
PetMed Express (NASDAQ:PETS) is an avoid-at-all-cost stock. I’m not basing my judgment call on its industry fundamentals. Instead, I think Petmed has numerous structural concerns echoed by its recent earnings miss and subsequent dividend suspension.
Offerings such as AutoShip & Save and PetPlus span approximately 51% of PetExpress’ revenue mix. Although those segments have delivered sustainable results, PetExpress’ broad-based 10-year compound annual growth rate (CAGR) of -2.0% is underwhelming. Therefore, the firm’s management has decided to reinvest its residual income instead of resuming its dividend program.
The pet medication market’s forecasted CAGR of 8.2% until 2029 presents plenty of promise for industry participants. Nevertheless, identifying high ROI opportunities can be challenging, given the breadth of the pet retail arena. Moreover, PetMed Express’ stagnating growth rate shows inefficient corporate portfolio management. As such, the efficiency of PetExpress’ future capital redeployment must be called into question.
PetMed Express’s return on equity of -4.83% shows an absence of residual value. Moreover, its trailing price-to-earnings ratio of 21.55x isn’t glamorous to any extent. Thus, the firm must execute a robust capital relocation strategy to reignite growth and shareholder value. However, I am not willing to bet on that happening, which is why I am bearish on PETS stock’s prospects.
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, Steve Booyens 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.