The Motley Fool

About to Buy Penny Stocks? Look at These 2 Companies 1st

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People are attracted to penny stocks for the potential life-changing wealth the stocks can bring. However, the chance of hitting the jackpot is low. Instead, there’s a much greater chance that you’ll lose your investment entirely.

Don’t let your hard-earned dollars go down the drain. I urge you to look at these companies first.

Tidewater Midstream & Infrastructure (TSX:TWM)

Since I began coverage of Tidewater last month, the little stock is already beating Enbridge hand over fist.

TWM Chart

TWM data by YCharts.

A simple reason for Tidewater’s outperformance is that it was a much cheaper stock than Enbridge at the time. Even after appreciating +13% in a short time frame, Tidewater is still very cheap.

At $1.48 as of writing, the stock trades at a price-to-cash-flow multiple of about 6.7. It trades at a +30% discount across 13 analysts’ mean 12-month target of $2.18 per share. In other words, there’s almost 50% of near-term upside potential on the stock.

Last month, management reiterated the target of delivering 20% annualized adjusted EBITDA per-share growth over the next 24 months. If achieved, there’s a good chance that the roughly 50% upside will be attainable over the next one to two years.

What’s more to like is that Tidewater offers a sustainable dividend yield of 2.7%, which can only add to shareholders’ total returns.

Vermilion Energy (TSX:VET)(NYSE:VET)

Instead of buying penny stocks, which is purely speculative, you’ll have a much better chance of double-digit returns from investing in Vermilion today.

The global mid-cap oil and gas producer strengthened its Canadian portfolio by making a smart acquisition for a quality business at a great price. With a diversified portfolio of high-netback businesses in Europe, North America, and Australia, there will be brighter days for Vermilion stock which is about 10% lower year to date.

Thomson Reuters’s analyst consensus’s 12-month target on Vermilion is 56.80 per share, which represents near-term upside potential of 39% from $40.82 per share as of writing.

Vermilion offers one of the safest dividends from the oil patch, as it has maintained or increased it on a per-share basis since 2003. Its eye-popping monthly dividend equates a yield of 6.76%. Combining Vermilion’s upside potential with its juicy dividend yield, the stock can deliver near-term total returns of nearly 46%!

Investor takeaway

Speculative investing in penny stocks can cost you a fortune. Invest in Tidewater or Vermilion for a much better chance of lucrative returns over the next 12-24 months. While you wait for the stocks to appreciate, you can earn nice income from their safe dividends.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng owns shares of Enbridge, TIDEWATER MIDSTREAM AND INFRAS LTD, and VERMILION ENERGY INC. Enbridge is a recommendation of Stock Advisor Canada.

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