Why this penny stock could break out this year

Investing in penny stocks, which are stocks that generally trade below $5 per share, requires a healthy dose of caution. For every Amazon (NASDAQ: AMZN) that has grown up to be a multi-bagger, there are probably 10 others that never went anywhere.

However, it is important to keep in mind that a penny stock doesn’t have to grow up to be Amazon to be successful; it just has to deliver steady, solid returns over time to be considered a worthwhile investment.

While betting too much on the fortunes of a small, young or unproven company is probably not a great idea, smaller positions may be warranted, especially if you find one with solid growth potential. One penny stock that you might want to consider is Traeger Inc. (NYSE: COOK).

A leader in pellet grills

Traeger is probably not a stock you’ve heard of unless you own one of their wood pellet grills. Traeger introduced the wood pellet grill in 1988, long before pellet stoves became popular, and remains the best seller in its class. 

While Traeger has been around since the mid-1980s, it has only been a public company since 2021. Since it started trading at $22 per share on July 1, 2021, the stock price has steadily declined to its current price of $2.39. In fact, Traeger stock has not had a positive year since its initial public offering, and last year, it fell another 12%.

However, a few catalysts that could get Traeger going back in the right direction make this penny stock worth a look.

The first is its low valuation. After three years of negative returns, its price-to-sales ratio has dropped to 0.51, and it is trading below book value with a price-to-book ratio of 0.96.

Traeger has also improved its efficiency, as its gross profit margin shot up to 37.9% in the third quarter from 26.7% in the third quarter of the previous year. This is significant because it shows the company is more efficient in generating profit from its sales. Additionally, the guidance for the full fiscal year put the company’s gross profit margin in that same range at 36.5% to 37%.

In addition, Traeger has improved its expense management, as it has steadily lowered its operating expenses over the past year, reducing its net loss to $19 million from $211 in the third quarter of 2022. Part of that has been better inventory management. In the third quarter, inventory stood at $102 million, down from $153 million at the start of 2023. In turn, that has led to lower supply-chain costs, as CEO Jeremy Andrus explained in the third-quarter report.

“Our efforts to right-size channel inventories allowed for more normalized replenishment rates at retail in the quarter, which drove strong growth in grills compared to last year,” he said. “Moreover, we are now seeing greater benefit from lower supply chain costs.”

Moving toward profitability

As with any penny stock, you should be cautious, as they are more prone to significant volatility. This is especially true with a stock like Traeger, which has been operating at a net loss.

However, its valuation is low, it has better expense management, and its gross profit margin is improving. Additionally, the lower-inflation environment should help sales for a company that is dominant in its niche.

The consensus price target among the nine analysts that cover the stock is $4 per share, which is 67% better than its current price. However, even the low end of the consensus estimate represents a 17% increase.

Traeger will release its full-year and fourth-quarter earnings in March. These numbers should shed more light on its trajectory, as should its 2024 guidance. However, Traeger might be one penny stock to circle as one that could be a mover in 2024.