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Many penny stocks have potential to break through the “penny stock ceiling” of $5 per share. Conversely, a great deal of stocks are trading above “penny stock territory,” which could be best described as doomed penny stocks.
While seemingly cheap today, these hopeless equities stand a strong chance of becoming even cheaper, due to worsening fundamentals. One can place these stocks into one of two categories. First, value traps are stocks that may seem like deep value on a screener, but they are usually cheap for a good reason.
Either there’s a persistent issue with the underlying business, impacting future prospects, or there’s something really weighing on the company, that cannot be immediately deduced from metrics like price-to-earnings (P/E) or price-to-book (P/B).
Second, busted growth plays are doomed for penny stock status. Think of former high-fliers that crashed and burned due to growth deceleration, or the end of a market bubble in their particular sector.
Below are seven of these soon-to-be doomed penny stocks. Be sure to avoid each one, at all costs.
B&G Foods (BGS)
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B&G Foods (NYSE:BGS) not only fits firmly in the value trap category of stocks in penny peril. Shares in this purveyor of packaged baking and food products is also a dividend trap as well. B&G Foods’ 9.74% forward dividend yield may be the greatest appeal to investors.
However, as I have noted in prior coverage of BGS stock, the company has slashed this dividend by 60.4% since 2022. Moreover, there’s an elevated risk that B&G Foods may have to once again implement a dividend cut. Even if B&G’s payout remains, don’t assume that shares will hold steady, while you collect its nearly double-digit yield. While cheap at a valuation of less than 10 times forward earnings, this valuation discount to peers is justified.
But, the discount may not be enough to account for both the company’s high amount of outstanding long-term debt, plus its mediocre growth prospects. While some analysts are optimistic about results starting in 2026, the BGS growth slump is poised to continue this year and next year. While perhaps worth a second look at penny levels, stay away as BGS sits just below $8 per share.
Barnes & Noble Education (BNED)
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At first, you may find it odd for me to consider Barnes & Noble Education (NYSE:BNED) to be one of the doomed penny stocks. After all, it’s only been a month since the college bookseller executed a 100-for-1 reverse stock split. This move enabled shares to maintain a New York Stock Exchange listing, as well as propel out of penny stock territory.
However, the BNED stock reverse split may only be a short-term fix. Sure, in conjunction with this reverse split, Barnes & Noble Education did complete a recapitalization that could have an impact on its fundamentals and prospects. A group of investors, led by Immersion (NASDAQ:IMMR), has invested $95 million into the company. This capital raise has helped BNED avoid bankruptcy and gives it a shot at pulling off a turnaround.
Regardless, shares have slid from a split-adjusted $34.70 per share, to around $7.11 per share, since the aforementioned developments. The jury’s still out whether a BNED comeback is possible. It’s unclear whether the company’s digital pivot won’t simply cannibalize its declining bricks-and-mortar operation. Irrespective of whether it ultimately pans out, shares appear to be on track to first make another move back into penny stock territory.
Denny’s (DENN)
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Indeed, Denny’s (NASDAQ:DENN) may serve up scores of grand slams each morning. Yet for investors, it’s hardly been a grand glam being a long-term owner of this restaurant stock. Shares in the famed diner operator and franchisor have declined by around 43.6% over the past year.
Over the past five years, DENN stock is down by nearly 70%. Now back to lows not hit since the onset of the 2020 Covid-19 pandemic, you may at first be tempted to make this stock a bottom-fisher’s buy. DENN trades for only 10.7 times forward earnings. Even a slight improvement in investor sentiment could lead to a massive re-rating. However, don’t count on such a scenario playing out anytime soon.
Why? Two reasons. First, investors remain downbeat on sit-down restaurant stocks overall, due to inflationary pressures and changing dining habits. Second, Dennys’ latest fiscal results provide little confidence that it is turning a corner. In Q1 of 2024, both revenue and earnings missed forecasts. Sell-side earnings estimates for 2025 range widely and have been walked back since the earnings release. A further Denny’s de-rating may be in store. In turn, possibly causing DENN to sink down to sub-$5 per share prices.
Hawaiian Electric Industries (HE)
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Potential legal liabilities make Hawaiian Electric Industries (NYSE:HE) one of the doomed penny stocks. The electric utility company, known by its customers as HEI, may be on the hook for nearly $5 billion in legal liabilities, due to last year’s Lahaina wildfires on the Hawaiian island of Maui.
With such a massive potential legal albatross across the company’s neck, it’s no surprise that shares have always tumbled down to a fire sale valuation. Currently trading for around $7.74 per share, HE stock sports a super-low forward valuation of just 4.4 times earnings. However, don’t assume that HE has become oversold due to this significant risk factor. Insurance covers just a fraction of the possible legal damages.
This month, a clearer picture will emerge, when Maui County releases the official report on the fire from the U.S. bureau of Alcohol, Tobacco, Firearms and Explosives (ATF). On July 1, news of the ATF report’s completion was enough to send HE down by nearly 10%. If the official unveiling of the report lays blame mostly on the company, it could lead to an immediate drop to deep penny price levels for HE shares.
JetBlue Airways (JBLU)
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Shortly after an antitrust court decision blocked its plans to merge with competitor Spirit Airlines (NYSE:SAVE) came the emergence of billionaire activist investor Carl Icahn. As a major shareholder in JetBlue Airways (NASDAQ:JBLU),he helped to send JBLU back up to higher altitudes. Since then, however, the “Icahn Lift” has fully disappeared.
Not a surprise, given that the investing legend sold off half his JBLU stock position before the end of March. Airline industry observers may speculate why Icahn decided not to make JetBlue “TWA 2.0,”. Instead he decided to take some chips off the table. But it’s hardly a positive sign that the low-cost carrier is about to implement significant cost improvement and revenue enhancement moves. Instead, JetBlue Airways’ fortunes appear to hinge highly on the direction of domestic airline demand.
On one hand, it’s still up for debate whether the “revenge travel” trend is dead, or has some more runway left. On the other hand, airfare prices have been trending lower. If industry demand trends become less favorable, and shareholder activism is becoming less of a factor in play, watch out! JBLU may soon be careening back down to low single-digit prices.
Nikola (NKLA)
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Nikola (NASDAQ:NKLA) is another of the doomed penny stocks that was previously already out of penny stock status, but escaped it via a reverse stock split. On June 20, shares in this manufacturer of battery and hydrogen electric trucks reverse split on a 1-for-30 basis.
NKLA stock tumbled to new lows following the split. So far this month, the release of promising Q2 of 2024 delivery results on July 2 has prompted a rally. However, you may not want to assume that this busted EV growth play can avoid falling back to prices under $5 per share. While the delivery data suggests that Q2 fiscal results could be better-than-feared, chances are that high cash burn persists, as seen in Nikola’s Q1 of 2024 fiscal results.
During that time, Nikola reported operating losses of $145.4 million. Although Q2 losses could narrow, Nikola only had $345.6 million in cash on hand as of March 31, 2024. In order to sustain operations, within a few quarters the company will need to raise more capital. This will result in additional shareholder dilution. Dilution has been a major factor in NKLA’s more-than-99% price decline since peaking during the 2020 wave of “EV stock mania.”
Redfin (RDFN)
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Redfin (NASDAQ:RDFN) fell into penny stock territory last November. But this year, shares in the real estate brokerage firm have bounced back to prices above $5 per share. A big reason for this has been a decrease in pessimism about the state of the housing market.
Interest rates have yet to come down. However, the market continues to price in the potential for stronger house purchase demand in 2025 and beyond, when interest rates are expected to move lower. However, the Federal Reserve’s continued higher for longer stance on interest rates calls into question this bull case for RDFN stock. Even during the pandemic-era housing boom, Redfin was operating in the red. In 2020, the company reported net losses of $23 million, while in 2021 net losses totaled $98.5 million.
Hence, even if the housing market experiences moderate improvement during 2025, this may not bode as well for Redfin’s fiscal performance. If you’re expecting RDFN to re-hit its more than $90 per share all-time high, don’t hold your breath. Another slide back down to prices under $5 per share is far more likely.
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, Thomas Niel 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.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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