While the market remains enamored with artificial intelligence stocks, many promising penny stocks are being overlooked. Amid the broad sell-off over the past two years, many small companies saw their share prices decline, even if their fundamentals remained strong. Now, with the hype around AI reaching a fever pitch, bargain opportunities in other sectors are easy to miss. However, with proper research, neglected microcaps can offer tremendous upside for investors willing to take on some risk.
Rather than chasing the latest fad, diversifying into unloved areas can propel your portfolio in the long run. Still, with rock-bottom valuations and potential catalysts on the horizon, not many penny stocks appear poised for a serious rebound in 2023. However, finding ones languishing below intrinsic value will allow you to get in early before the crowd catches on.
Don’t get me wrong, AI is exciting. But that bandwagon is now too crowded. I believe it is much better to branch out into overlooked stocks without being late to chase the latest trend.
Terran Orbital (LLAP)
While artificial intelligence and tech stocks have dominated headlines lately, I believe some promising microcap opportunities are being overlooked. Terran Orbital (NYSE:LLAP) is one such penny stock with massive upside potential, in my view. Despite the company securing a gigantic $2.4 billion contract, shares languish around $1.22 apiece. However, with milestones approaching that will generate substantial cash flows, Terran presents a compelling risk/reward proposition.
In March 2022, Terran announced a colossal deal with Rivada for the design and manufacture of 300 low-earth orbit satellites. This contract win validates Terran’s capabilities and provides multi-year visibility into revenue and earnings. While skeptics question Rivada’s ability to pay, Terran’s management team has done extensive due diligence, and feels confident in its financial strength.
With the initial design phase now underway, Terran expects to invoice and collect around $180 million from Rivada in the second half of 2023. Beyond the Rivada deal, Terran boasts a backlog spanning dozens of programs. So, they have plenty of additional business lined up beyond this contract.
Importantly, Lockheed Martin (NYSE:LMT) clearly sees immense potential in Terran, evidenced by their $100 million equity investment. This vote of confidence from an aerospace titan speaks volumes about Terran’s prospects, in my view. While the road ahead entails execution risks, Terran looks poised to capitalize on surging global demand for satellite networks and space infrastructure.
Trading at just 1.7-times revenue, LLAP shares appear significantly undervalued relative to peers. Considering the company’s bright growth outlook and strengthening financial position, this disconnect likely won’t persist for long. Once the market grasps Terran’s immense earnings power, shares could launch considerably higher. For investors willing to shoulder some risk, buying LLAP stock in this range looks like a steal in my eyes.
Harte Hanks (HHS)
With its tiny $46 million market capitalization, Harte Hanks (NASDAQ:HHS) clearly qualifies as a penny stock. However, underneath the microcap exterior lies a solid business generating over $200 million in sales annually. After declining for years, Harte Hanks has undergone an impressive turnaround under new leadership. While headwinds from a slowing economy persist, I believe the company’s leaner structure positions it well going forward. With sentiment still depressed, HHS offers deep value right now.
Harte Hanks provides marketing services, customer care solutions, and omnichannel logistics services to major corporations worldwide. While the pandemic and ensuing recession hurt results, Harte Hanks has taken decisive steps to transform the business. This includes rationalizing underperforming segments and optimizing the cost structure.
Consequently, the company achieved consistent profitability and positive cash flow over the past six quarters. Thanks to these efforts, Harte Hanks looks far healthier today compared to its precarious situation a few years ago. However, the stock trades at just 0.2x sales and 11x forward earnings, very inexpensive valuation multiples.
No doubt, revenue headwinds persist as clients reduce marketing budgets amidst economic uncertainty. Management expects revenues over the next two quarters to align with Q2’s $47.8 million figure. But with costs calibrated lower, Harte Hanks should remain solidly profitable. Looking ahead, strengthening sales efforts and introducing new digital services provide potential catalysts.
Considering its rock-bottom valuation and improving fundamentals, HHS stock appears extremely oversold at today’s levels. For investors with a long-term horizon, current prices make for an enticing entry point. While turnarounds take time, I expect Harte Hanks to deliver substantial upside for patient shareholders as conditions normalize.
LZG International (LZGI)
As an artificial intelligence company, LZG International (OTCMKTS:LZGI) falls within the red-hot AI sector that has captivated Wall Street lately. However, unlike the high-flying names dominating headlines, LZGI shares languish near all-time lows of around 36 cents. But with game-changing partnerships and acquisitions fueling major growth, this overlooked microcap could be set for a huge breakout.
LZG International develops AI solutions to help businesses optimize complex decisions and enterprise workflows. The company’s Outcomes software platform seamlessly integrates AI capabilities across sales, marketing, operations, and risk management functions. This allows organizations to harness data and AI at scale to drive efficiency and growth.
In recent quarters, LZGI has inked deals with several F500 leaders, including Bank of America (NYSE:BAC) and Boeing (NYSE:BA). They also acquired AI technology assets from Intellagents and expanded internationally through the purchases of Prime Source and SO Tech. These value-accretive transactions dramatically expand LZGI’s market opportunity.
Thanks to these catalysts, the company’s revenue surged to $19.8 million over the last nine months, compared to just $86,894 during the same period a year ago. While still posting losses, LZGI is investing aggressively to capitalize on strong commercial momentum. Trading at less than 3-times sales, I believe the company’s current $55 million valuation leaves an enormous upside once profitability is achieved.
In July, LZGI received a Wall Street buy rating with a $5 price target, representing over 1,200% upside from current levels. With the business inflecting higher and the balance sheet recently strengthened, I expect this overlooked AI play to break out in the near future.
Penny Stocks
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Read More: Penny Stocks — How to Profit Without Getting Scammed
On the date of publication, Omor Ibne Ehsan did not have (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.