Why Wall Street Loves These 3 Penny Stocks

Key Points

• While the high risk-high reward gamble attracts some investors to penny stocks, Wall Street typically avoids them - but there are exceptions.
• Nu Holdings is actively covered by seven mostly bullish analysts whose average price target implies 55% upside.
• B2Gold is benefitting from the demise of Silicon Valley Bank and fears of a banking industry meltdown.
• Global banking fears have pushed Itaú Unibanco stock back to the $4 level, creating a more favorable long-term entry point.

Penny for your thoughts? For a penny stock investor, top of mind is big gains. The opportunity to accumulate shares in low-priced equities with high return potential has long been the appeal of stocks priced under $5 (if not under $1).

The companies that issue these shares tend to be small and unproven in their respective industries. While positive surprises in earnings reports or other headlines can produce big rallies, the opposite can be true. High hopes often get dashed, leading to big declines. Sometimes a penny stock gets delisted from a major exchange. It can even go to zero.

So while this high-risk-high-reward gamble attracts some investors to penny stocks, Wall Street typically avoids them. Why is that?

This is partly because sell-side research firms can only cover so many companies. Therefore, they tend to focus on blue chips and large caps that are widely held in client portfolios. And since low priced stocks usually aren’t associated with strong fundamentals, this can be even more reason to stay clear.

But there are exceptions.

Of the 272 penny stocks that currently trade on the New York Stock Exchange, almost half have a consensus rating of ‘Buy’ according to I/B/E/S Estimates. The problem is, only one or two analysts cover many, so the rating carries less power. 

Here are three penny stocks that check three important boxes: 1) well-covered by the Street, 2) bullish analyst sentiment and 3) good upside.

How Did Nu Holdings Perform in 2022? 

Nu Holdings Ltd. NYSE: NU is the company behind Nu Bank, a digital banking platform that serves 74.6 million customers in Brazil, Mexico and Colombia. It also operates a technology hub in Argentina. 

In addition to growing its customer base by 38% last year, the company grew revenue 182%. The growth was driven by rising Latin American demand for a convenient one-stop solution for all things finances — savings accounts, credit cards, loans, insurance, investments and more. Analysts see plenty more growth ahead. 

As internet access continues to spread across Nu’s footprint, more consumers and small businesses are expected to turn to their smartphones for digital finance solutions. At the same time, new product launches and cross sell opportunities stand to squeeze more growth out of existing customers. Nu Holdings is actively covered by seven mostly bullish analysts whose average price target implies 55% upside. 

Why Is B2Gold Stock Going Up?

Trading under $4.00 per share, B2Gold Corp. NYSE: BTG is one the Street’s favorite gold producers. The company is headquartered in Canada but its three gold mines are located in Mali, Namibia and the Philippines. It has other gold mining interests through direct investments and joint ventures. B2Gold’s long-term strategy is based on 1) maximizing profits from its operational mines, 2) advancing its exploration portfolio and 3) reducing debt.

In the near term, however, B2Gold is benefitting from the demise of Silicon Valley Bank and fears of a banking industry meltdown. Gold prices have moved higher during the current financial crisis in conjunction with a decline in the value of the U.S. dollar. Since the two assets compete for safe haven investment, a suddenly shaky U.S. financial system and UBS’s takeover of Credit Suisse are attracting investors to gold. Gold is up approximately 10% since SVB stock was delisted and quickly closing back in on $2,000 per ounce.

Surging gold prices along with management’s production guidance north of 10 million ounces has analysts raising their earnings estimates for B2Gold. The consensus estimate for 2023 EPS now implies 15% growth. Since the year began, four of five firms have called the stock a buy and the group’s average target points to more than 50% upside. 

Is the Itaú Unibanco Selloff an Opportunity?

In the past 30 days, three Wall Street firms have called Itaú Unibanco Holding SA NYSE: ITUB a buy while Bank of America stuck with its Hold rating. All four analysts have price targets that imply significant upside and the average equates to a 45% potential return. 

Itaú Unibanco is well liked by analysts because it is well known in its home market of Brazil as a leading retail and commercial bank. While the country has had its share of economic downturns in recent years, the bank’s presence in the wealthy Southeast part of Brazil has allowed it to weather storms better than competitors. Its strategic positioning in the more economically active regions of Argentina, Chile, Paraguay and Uruguay is also a source of resilience.

In last month’s earnings call, management offered a bright outlook for 2023 that helped Itaú Unibanco shares climb out of penny stock territory. The global banking fears that have since developed have pushed the stock back to the $4 level, creating a more favorable long-term entry point. The Street is forecasting 13% earnings growth this year which makes this penny stock’s 8x P/E ratio a valuation worth banking on.