A scrap metal merchant and an electric vehicle maker that has sold just four cars top the list of so-called “penny” stocks that are out-trading the likes of Tesla and Apple, prompting some analysts to warn that markets are becoming overheated.
Seven of the top 10 most traded US equities in May, as measured by the number of shares bought and sold, are penny stocks worth less than $1, according to Cboe Global Markets. None of the companies are profitable.
The huge volumes in so many little-known stocks suggest a renewed appetite among retail investors for cheap names in which they believe they can quickly make a lot of money.
“When markets get frothy, the speculative froth often hits penny stocks as well — this is a classic sign of market peaks,” said James Angel, a finance professor at Georgetown University.
“Penny stocks tend to be extremely volatile, so you can make or lose a ton of money very quickly,” he added. “That appeals to the speculative urge.”
The frenetic trading comes after a strong rally in US blue-chips over the past seven months, with tech stocks reaching a new record high this week, although on Friday the benchmark S&P 500 index recovered from early lows, but still suffered its first weekly decline in more than a month.
Scrap metal merchant Greenwave Technology Solutions, whose website proclaims “scrap is the new precious metal”, topped the leaderboard for May. It has 588mn shares outstanding, and a daily average of 510mn shares were traded during the month, according to Cboe Global Markets data.
Over that time, its market capitalisation swung between $4mn and $159mn and the value of its shares from 4 cents to 16 cents. The company did not respond to a request for comment.
The only large-cap company to make the top 10 most-traded was Tesla, a regular favourite among active traders.
While, in value terms, trading in penny stocks is a tiny fraction of the turnover of mega-caps, investors’ increased interest has coincided with a resurgence in so-called “meme” stocks such as retailer GameStop and cinema chain AMC, which benefited from frenzied retail investor interest in 2021.
AMC was the sixth most-traded US stock in May with volumes more than 7 times their recent average.
“Penny stocks are not the same as the meme stock phenomenon, but let’s say they rhyme. It’s people willing to put fundamentals aside and chase returns,” said Steve Sosnick, chief market strategist at retail broker Interactive Brokers.
Sosnick’s own weekly scan of the most-traded stocks on Interactive Brokers’ platform has recently thrown up several lesser-known microcap companies.
“It’s emblematic of what I consider to have become a very frothy market,” he added.
Stocks that trade under $1 for a certain period are at risk of being delisted by exchanges and, for that reason, institutional investors tend not to touch them.
The rise in volumes has reawakened concerns about the impact of their financing methods on shareholders as well as the rules that allow them to remain listed.
Several of the most traded stocks by volume in May have sold new shares recently. The deals, typically in the form of bonds that convert into stock at a discount to the market price, dilute existing shareholders and swell trading volumes when the new shares are resold, which often happens quickly.
Electric vehicle maker Faraday Future Intelligent Electric was the second-most-traded stock in May. Its 2023 accounts, filed this week after a delay due to staffing issues, showed sales of four cars and leases for a further six since a long-delayed launch last year. They also contained a warning that “it will likely file for bankruptcy protection if it is unable to access additional capital”.
Several posts on social media platform Reddit focused on the wild swings revealed in Faraday’s share count. This has soared from 57mn in November to 1.4bn by February, when it did a so-called “reverse split”, swapping three existing shares for one new one. Its latest filing shows 440mn shares outstanding.
Reverse splits have become a common tool for sub-dollar companies as a way of boosting share prices and warding off the threat of delisting. There are 471 companies currently with shares trading under $1 in the US, according to S&P Global Market Intelligence data, up from 125 a year ago.
More than 70 reverse splits have been announced so far this year, according to data provider Wall Street Horizon. The number of such share swaps roughly doubled in 2023 to 219 compared with the previous year despite a major rally in stock markets after a tough 2022.
Greenwave announced a 1-for-150 reverse split this week, effective from Monday. Faraday Future, which is still behind with its financial filings and whose shares have halved since it published its 2023 accounts, has appealed against a delisting decision by Nasdaq.
“The company expects its securities to continue to trade on Nasdaq in the normal course during the pendency of the hearing process,” it told the Financial Times.
