What is the definition of a penny stock?
The definition of a penny stock is quite broad. You'll get varying answers from different investors, but the general consensus is that a penny stock is a stock that trades below $5. However, it's important to note that a lot of popular stocks, ones that don't have the volatility or market capitalization of a penny stock trade below $5. So here is a few more guidelines to help you narrow down your search:
Penny stocks are typically smaller companies, and their shares are often illiquid (not easy to buy and sell)
They have a small following, and typically are not covered by major analysts
They usually trade OTC (over-the-counter, more on this later) or through pink sheets.
Canadians often confuse the term small-cap stock with penny stock. Unlike numerous small-cap stocks, you won't find penny stocks trading on the TSX.
This is often because they are too small to meet the requirements needed to list on major exchanges, and don't file the proper paperwork needed.
How do I buy penny stocks in Canada?
The first box you need to check off if you want to invest in penny stocks is the ability to handle significant volatility. If you don't think you can stomach the risk, simply head to our how to buy stocks page to get started investing in the major exchanges.
What I like to tell investors looking to start trading the pink sheets, is to set aside an amount you would be completely comfortable losing. I wouldn't recommend anyone invest their whole portfolio into penny stocks. But a designated amount, say 10% of your total portfolio, is completely reasonable.
FP Newspapers (TSXV:FP)
Speaking of terrible liquidity, you’ll want to be careful trading Canadian penny stock FP Newspapers (TSXV:FP) shares. This $0.63 stock sometimes goes a whole day without trading and has average daily trading volume of just a few thousand shares.
I’m the first to admit a company that owns 49% of the distributable cash of several newspapers in Manitoba – most notably The Winnipeg Free Press – doesn’t sound like a very exciting penny stock opportunity in 2021. But this stock is insanely cheap, and it seems to be turning a corner.
It earned approximately $0.32 per share in 2020, while shares trade for less than 2x that much. It’ll get a nice journalism tax break from the Canadian government in 2021, too.
It also could sell its headquarters in Winnipeg for a nice gain as well. Shares could see another boost when an important loan gets extended.
The stock could also pay a substantial dividend in a year or two once it starts to earn a little more money and it gets its balance sheet more under control. If this happens, you’ll be very happy you got in today.
Kodiak Copper (TSXV:KDK)
Kodiak Copper (TSXV:KDK) is a newer player on this list of top Canadian penny stocks primarily because of the rising price of copper.
If you haven't been paying attention, the price of copper has launched over the last year, going from lows of $2.10 in 2020 to touching highs of $3.70 just recently in 2021. Obviously, with this company being essentially a copper pure-play, it stands to benefit from this increase in price.
In fact, in September of 2020, resource giant Teck Resources invested $8 million into Kodiak Copper, representing a 9.9% stake in the company, and showing strong signs of confidence and outlook for the junior exploration company moving forward.
The company generates no revenue and is largely a play on its exploration efforts and asset base which is located in British Columbia, Arizona and Nunavut.
The company actually recently went through a transition, as it changed its name from Dunnedin Ventures to Kodiak Copper at the start of 2020, and is probably one of the higher risk plays on this list. However, there's always large potential in exploration companies in the very early stages. Just be wise, and invest with expendable capital.
Namesilo Technologies (CSE:URL)
Namesilo Technologies (CSE:URL) is an internet services company in Canada that registers domain names, provides hosting, offers email services, and provides various other needs for the owners of websites.
In 2021, having your own website is imperative. Customers don’t bother picking up the phone if they have a question or concern; they’re just going to go straight to your website. If you don’t have a digital advertising strategy, good luck.
Namesilo is delivering blistering growth of late, more than doubling its top line on a year-over-year basis in 2019. Net income before taxes, meanwhile, grew more than 1,000% compared to the same period last year. Profit margins expanded as well, and the company reported strong customer retention rates.
The question is whether Namesilo can continue its blistering growth. It should benefit from new businesses (and individuals) becoming serious about building an online presence, as well as taking customers from competitors. Its focus on giving great deals and providing excellent service is a winning combination.
And at just $0.25 per share, Namesilo certainly qualifies as a penny stock. The stock only has a market cap of just under $23 million, so big-time investors might struggle with its lack of liquidity.
Fobi AI (Formerly Loop Insights) (TSXV:MTRX)
Fobi AI (TSXV:MTRX) has surged in value recently, but prior to this the company had a market cap of just over $40 million. It now sits at just under $190 million, but I'd still firmly place this company in penny stock territory.
Fobi AI, which recently changed its name from Loop Insights, provides retail and marketing solutions for digital and physical landscapes. They're primarily situated in the AI sector, and the company's primary function is to enable brick and mortar companies to analyze critical customer data, including customer spending habits and trends.
The company works in the casino, sports, hospitality, retail and education sectors and has signed multiple critical contracts with some major players here in Canada, including Telus, Amazon and Shopify. Although the company does not generate any revenue at the time of writing, this is still a company you'll want to keep a close eye on moving forward.
As of right now, it's very difficult to value this company considering it has no form of revenue generation or any sort of earnings. And because of this, we can expect the company to be, like many Canadian penny stocks, extremely volatile around earnings time and on news releases. There is a lot of speculation and forward earnings priced in to Loop's price right now, so we'd stress extreme caution if you're considering taking a position.
Athabasca Oil (TSX:ATH)
Athabasca Oil (TSX:ATH) is a classic penny stock conundrum. It has huge upside potential, but there’s also a real possibility the company could go bankrupt. It’s almost like flipping a coin, except if you win, you’ll likely do far better than just doubling your money.
The company has light oil production in both the Motney and Duvernay fields in Alberta Canada, as well as heavy oil production near Fort McMurray. The heavy oil assets have a long reserve life, but the company isn’t making much from any of its production because of low oil prices.
Athabasca projects it’ll start earning free cash flow in the next couple of years, but in the meantime, it’s forced to spend approximately $125 million each year on sustaining capital. It has cash on the balance sheet, but it must also contend with refinancing some US$450 million worth of debt coming due in 2022.
You could make a lot of money if oil recovers and Athabasca Oil shares shoot higher. But this $0.22 stock is cheap for a reason. You’re taking some significant risk buying today, especially with the demand in oil plummeting due to COVID-19.
However, a quick recovery in the industry could lead to a quick recovery in this stocks share price as well. Prior to COVID-19, Athabasca's share price sat in the low $0.50 range.
One of our favorite Canadian penny stocks is Redishred Capital (TSXV:KUT), which owns and operates the Proshred brand.
Proshred has two separate business models – it both owns mobile paper shredding trucks and it franchises out locations to interested franchisees. The company has either corporate or franchised operations in 40 different U.S. cities.
The mobile paper shredding model has a few interesting advantages. It allows Redishred to easily acquire competitors and then rebrand them. It’s more secure – and convenient -- than bringing documents to a central location. And the multi-city business model allows brand recognition in an industry that’s currently very fragmented.
It’s well poised to keep growing, thanks to its clean balance sheet with almost zero debt. Top managers are major shareholders with an ownership stake of more than 40% of the company.
And unlike many penny stocks, this company generates plenty of cash flow. Remember, this company has a share price of $0.61 and a market cap of just over $48 million. It doesn’t take much to really move the bottom line.
Redishred is one of our top penny stock picks in Canada because it’s in a good business with great growth potential. It’s the kind of stock you’ll want to stick in your portfolio and own for a very long time.
However as with any other penny stock, you'll want to keep a close eye on it incase anything materially changes.
This article was written by Dan Kent from Stocktrades.ca