Penny stocks, defined as equities that trade at under $5 per share, have a bad reputation within many investing circles. The core reason is that most companies with low-priced equities are struggling businesses with an unfavorable outlook.
However, the 2022 bear market has created a unique situation within the high-risk penny stock landscape. Scores of promising early-stage companies have seen their share prices tumble into penny stock territory this year.
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Which of these newly minted penny stocks offer the most compelling risk-to-reward ratios? Bionano Genomics (BNGO -2.78%) and Tilray Brands (TLRY -3.38%) are two hard-hit names that appear close to a powerful trend reversal. Here's what investors need to know about these grossly undervalued healthcare stocks.
Bionano: 288% upside potential
Bionano Genomics is a small-cap genome analysis solutions company. Its core business centers around optical genome mapping (OGM), diagnostic services, and software. On the hardware side, Bionano markets and sells the Saphyr system, which automates optical genome mapping of ultra-high molecular weight DNA. The system is designed to enhance life science research by enabling the analysis of clinically meaningful structural variations at the genetic level.
The company also provides diagnostic testing services to patients with autism spectrum disorder and other neurodevelopmental disabilities. Lastly, Bionano, through its BioDiscovery business, offers next-generation sequencing and microarray data analysis.
Financially speaking, the company's life science research business has been growing at a steady clip in recent quarters, with sales jumping by a healthy 55% in Q3 relative to the same period a year ago. Next year, Wall Street estimates that the company's annual sales will rise by a staggering 72.5%.
Despite this blistering growth rate, Bionano's shares have still lost an eye-popping 25% of their value this year. Investors have shied away from this life sciences research stock because the company's platform operates in a highly competitive space, the market for OGM devices and services is still being developed, and most importantly, it has yet to reach the break even point in its life cycle.
Now, Wall Street's average price target on this penny healthcare stock implies a jaw-dropping upside potential of 288% from current levels. To reach these dizzying heights, however, Bionano's management will have to convince investors that its OGM platform will become the gold standard for a market currently valued at approximately $8 billion annually.
Bionano's top line has been headed in the right direction of late. But it still has a long way to go to establish itself as the premier OGM player. So if you are going to buy shares, it might be wise to build a position slowly over time as Bionano's business gradually ramps up.
Tilray: 219% upside potential
Tilray Brands is a Canadian licensed cultivator of cannabis. Since the country legalized marijuana use for recreational purposes among adults roughly four years ago, Tilray's shares have plunged by an unsightly 97.5%. The long and short of it is that legalization in Canada hasn't translated into positive free cash flows for any of the country's top-tier cultivators.
There are two solid reasons to think the worst for Tilray may be over, however. First, Tilray sports a leading position in key international markets like Germany, which is reportedly on the cusp of legalizing weed for recreation purposes among adults. This move ought to open a sizable market valued at $4.6 billion a year. Tilray should thus benefit enormously from this particular legalization effort.
Second, Tilray is also ready to move into the U.S. market upon federal permissibility -- an event that may be close at hand following Biden's decision to initiate a cannabis scheduling review last month.
What's the big picture? Morningstar's equity strategist Kristoffer Inton thinks Tilray's stock could rip higher by a noteworthy 219% over the next 12 months. That's an optimistic take, to be sure. But the company does have the assets to capture an outsized portion of the German cannabis market, and to quickly migrate into the U.S. market upon the end of federal prohibition. Armed with these insights, Tilray stock might be a worthwhile speculative buy for ultra-aggressive investors.
