Trading penny stocks can deliver robust returns in the blink of an eye. In the last month, Tilray Brands(NASDAQ:TLRY) stock has surged by roughly 30%. This is just one example of the ferocity of the rally in stocks under $5.
However, I believe that penny stocks with potential are not just trading ideas. In the penny stocks space, there are names that represent good business with decent fundamentals. If investors can hold these stocks patiently for three to five years, returns can be surprisingly high. In October 2022, Miniso Group (NYSE:MNSO) stock traded at $5. In September, the stock touched a high of $30. This already implies 6x returns within 24 months.
Of course, it’s easier to cite examples of the past. However, I can say with some conviction that investors will not be disappointed if they choose fundamentally sound stories. This column, therefore, discusses three stocks under $5 that look attractive from a 36 to 60-month investment horizon.
Cronos Group (CRON)
I believe that Cronos (NASDAQ:CRON) stock is possibly the most undervalued name among cannabis stocks. From current levels of $2.10, I expect 5x to 10x returns in the next five years. These returns are likely even if there is no federal-level legalization of cannabis.
One reason to be bullish on Cronos is the balance sheet. As of Q3 2023, Cronos reported cash and equivalents of $840 million. The company has been conserving cash and a big acquisition might be on the cards.
Further, in a federal-level legalization scenario, Cronos will be positioned to make aggressive investments. It’s worth mentioning here that cannabis can be potentially “reclassified as a Schedule III drug under the Controlled Substances Act.” This will be a big catalyst in the U.S. as “Schedule III substances are recognized as offering potential therapeutic benefits and can be obtained with a prescription.”
In September, Cronos sent its first order of cannabis to the German distribution partner, Cansativa. Further, the company plans to ship cannabis to Vitura Health Limited for sale in the Australian medical market. With new markets and the continued launch of new products, the growth outlook is positive.
Standard Lithium (SLI)
Standard Lithium (NYSE:SLI) is another stock under $5 that can be a 10-bagger from current levels of $2.10. SLI stock looks massively undervalued after a correction of 27% for year-to-date. The correction aligns with a sharp correction in lithium prices. Once sentiments reverse, lithium stocks are poised for a big rally.
Standard Lithium commands a market valuation of $354 million. This seems small as compared to the after-tax net present value of the company’s assets. Production will come a few years later, but SLI stock is trading significantly below fair value. The valuation gap will be filled as lithium trends higher.
In the Arkansas Smackover, the company’s Phase 1A project has an after-tax NPV of $722 million. However, the game-changer is the South West Arkansas Project with a base case NPV of $4.5 billion. Additionally, the company has 45,000 acres at Bristol Lake that remain to be evaluated for potential reserves. Clearly, with prized assets, Standard Lithium is a steal at current valuations.
Polestar Automotive (PSNY)
After a deep correction, Polestar Automotive (NASDAQ:PSNY) stock has been sideways for the last three months. I believe that a breakout on the upside is imminent after this consolidation. Polestar looks undervalued and can trend higher from current levels in the next few years.
The electric vehicle company has commenced production of Polestar 4. Mass deliveries next year will support growth. Further, the company is also targeting the launch of Polestar 5 next year with Polestar 6 due in 2026. With an attractive line-up, the company is poised for healthy delivery growth.
A major concern for Polestar has been cash burn, but the company guided for a cash flow breakeven in 2025. With cost-cutting measures initiated, it’s likely that margin improvement will be seen through 2024. This will be positive for PSNY stock.
Polestar is also looking to expand its manufacturing footprint. The Company expects to commence production in 2025 at its newly announced South Korean factory. With multiple positives, PSNY stock seems deeply undervalued and poised for a strong reversal.
On the date of publication, Faisal Humayun 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.