As a value investor, I don’t usually go digging for value in the penny stock jar. I guess this is for the same reason you wouldn’t go looking for diamonds at the local pound store!
Once in a while, though, I come across something that looks truly valuable in an unexpected place. I get that sense about these two rather obscure penny stocks.
I don’t necessarily think both of these are value stocks per see. However, they have great prospects (and great earnings histories) considering they are penny stocks. Oh, and unlike in the UK — where penny stocks are literally worth pennies because they trade at £1 or less — in the US, according to SEC rules, penny stocks are those that trade at $5 or less.
Penny stock for the price of a pint
First up is the Brazilian beverage giant, Ambev S.A (NYSE: ABEV), which is in turn owned by Anheuser-Busch InBev, the largest beer company in the world. This penny stock is currently trading at $2.80 — or the price of five and a half pints of Skol, Ambev’s most popular brand and the second most valuable beer brand in Latin America!
This stock benefits from a host of factors in its favour. Ambev has access to a huge market and sells a plethora of brands that are widely recognised across Latin America and the world. The sheer size of its consumer base gives it pricing power unlike most companies. Its recent price hike in light of inflationary pressures proves this. Both net income and free cash flows have been growing steadily over the past 10 years, too.
My major concern is that inflation is currently over 10% in Brazil, which is Ambev’s largest market. Inflation fears have further exacerbated the weakening of the Real, which means the future is quite unpredictable. However, this penny stock is trading at 15 times earnings. I, therefore, think it is undervalued relative to the quality of the business and earnings it has.
Big time steel
Gerdau S.A. (NYSE: GGB) is the largest manufacturer of long steel in Latin America. It is also, however, Brazilian. This means that it suffers from all the macroeconomic risks that I outlined above for Ambev. Additionally, it is somewhat exposed to the volatility of iron ore prices. That being said, dividend investors will no doubt love the fact that the yield on this penny stock is currently a juicy 11.01%! Its current price-to-earnings ratio of 3.61 and a price-to-book ratio of 1.20 indicate that this stock is trading below its true value.
Gerdau posted a Q3 for the ages, with net earnings growing by an incredible 604% to 5.59 billion reais ($991.06 million). Steel production also grew 7% in the same quarter, which was bolstered by a 2% growth in sales. As a value investor, I like that free cash flows have doubled over the past five years. If Gerdau can continue to grow at a good rate, I think that the bullish case for this stock is as solid as steel. I’m looking to buy both of these stocks for my portfolio this year!
