Smart money doesn’t only go to large companies like Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN). Many investors look for smaller companies poised for a breakout that have reasonable valuations. Still, penny stocks have their risks — over 90% fail. But the stocks that do well can yield respectable returns for investors. 

Many retail investors buy penny stocks in the pursuit of high returns, and billionaires are investing right alongside them. Investors can select from many penny stocks, but smart money offers clues. While you shouldn’t buy a stock only because a billionaire put money into it, these investors conduct due diligence before entering and exiting investments. Following billionaire investors can reveal great stock ideas to consider, but you should do your own research to see if their stock picks align with your portfolio goals.

Penny stocks have great potential due to their small market caps. While most penny stocks fail, finding diamonds in the rough can be quite profitable. Billionaire investors have recently poured their cash into these three penny stocks:

Vaalco Energy (EGY)

Vaalco Energy (NYSE:EGY) acquires and develops properties to produce crude oil, natural gas and natural liquids. The Houston-based company has production sites in West Africa and Western Canada.

Investors may notice a P/E ratio under 6, along with a 6.78% dividend yield. The company recently announced a $0.063 per share dividend, which is almost double last quarter’s dividend of $0.033 per share. The company’s FY22 net income of $51.9 million ($0.73 per diluted share) and debt-free balance sheet suggest the dividend is sustainable.

Billionaires Jim Simons and Howard L. Morgan hold over 2.7 million Vaalco Energy shares in their firm, Renaissance Technologies LLC. Their stake in the company exceeds $11 million, and the firm is set to receive over $168,000 from the quarterly dividend. 

The penny stock’s performance is heavily tied to the oil and gas industry. That industry saw record profits in 2022, and many companies have enough cash flow to make bigger investments in 2023. Vaalco Energy ended 2022 with an unrestricted cash balance of $37.2 million and adjusted working capital of $44.2 million.

Arc Document Solutions (ARC)

Arc Document Solutions (NYSE:ARC) is a digital printing company that converts hardcopy documents into secure and searchable digital libraries. The company serves a wide range of professionals who want to make their graphic designs more tangible. Arc Document Solutions has over 150 digital print shops in the United States. 

When looking at any penny stock, it’s important to look at the fundamentals and valuation. The company has a respectable 11.31 P/E ratio and a dividend yield hovering at around 6.82%. It’s rare to find penny stocks that are profitable and give out dividends, but Arc Document Solutions checks both boxes. After pausing its dividend for over a decade, the company reinstated it in 2020. Within three years, the dividend has gone up from $0.01 per share to $0.05 per share. The penny stock’s 80% payout ratio doesn’t suggest much room for the dividend to grow, but the company has experienced seven consecutive quarters of domestic sales growth, which can improve the payout ratio in the future.

David G. Booth and Rex Sinquefield of Dimension Fund Advisors believe in the company’s future. The billionaires have invested over $5 million into the stock through their firm and are set to receive a dividend of over $90,000 from their position this quarter.

Rover Group (ROVR)

Rover (NASDAQ:ROVR) is a freelance marketplace where people can buy and sell pet care services. Customers can find dog walkers, pet sitters and other freelancing services on the platform. The penny stock has a market cap just shy of $1 billion and surged over 16% on strong Q1 2023 earnings.

The pet care industry saw a boost during the pandemic as more people became pet owners. Morgan Stanley predicts the pet care industry will grow at 8% per year by 2030. Rover stands to benefit from this tailwind, and the company’s earning estimates project 22% year-over-year revenue growth at the midpoint. If the guidance holds, investors can expect Rover to generate $207-$217 million in 2023. The company also approved a $50 million stock buyback program in an effort to increase share prices by reducing the supply of common stock.

The average analyst price target for Rover is $5.75, which suggests a 23.39% upside over the next 12 months. Vanguard, Blackrock, and Fidelity own Rover shares across several mutual funds.

On Penny Stocks and Low-Volume Stocks: With only the rarest exceptions, InvestorPlace does not publish commentary about companies that have a market cap of less than $100 million or trade less than 100,000 shares each day. That’s because these “penny stocks” are frequently the playground for scam artists and market manipulators. If we ever do publish commentary on a low-volume stock that may be affected by our commentary, we demand that InvestorPlace.com’s writers disclose this fact and warn readers of the risks.

On this date of publication, Marc Guberti 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.