TM editors' note: This article discusses a penny stock and/or microcap. Such stocks are easily manipulated; do your own careful due diligence.

When it comes to trading penny stocks, risk can play a major role. But with that risk comes the potential for big rewards. If you're reading this, I'm probably not telling you anything you don't already know. The problem is that newbies have a hard time learning when to buy or sell.  Market timing is somewhat of a holy grail for certain traders. But the sooner you realize that buying at the absolute bottom or selling at the absolute top isn't the only way to make money in the market, the sooner you'll be able to design a successful trading style.

So, where do we go from here? The small-cap space has been riddled with volatility. Last week we saw this come to the forefront in a big way. Not only did broader markets like the S&P 500 and Nasdaq dip, so did small-cap stocks. While not all penny stocks fit this definition, ETFs like the Russell 2000 (IWM) and S&P Small-Cap ETF (IJR) have been used as a gauge to get a temperature of sentiment from smaller companies. Once the closing bell rang on Friday, the verdict was in. Small-cap stocks had fizzled out. The IWM and IJR had declined by as much as 6% during the second week of May. That trend seems to have persisted at the start of this week as well.

Read Between The Lines Right Now

In my opinion, it's important to read between the lines a little bit. What do we know right now? We know that inflation is a real thing, it's happening in real-time, and it has become a nuisance in the market headlines. So why try to avoid it? Many are turning toward value names to hedge their bets against numerous secular downtrends. Meanwhile, others are simply getting frustrated because they refuse to adjust their portfolio to current market conditions. However, if you find yourself in the unique situation of actively managing your own account, trading has been a big winner for many market participants.

It's important to read between the lines. Now, I know not everyone can sit around at their desk and monitor the stock market all day. But if there's ever been a market for "picking" individual stocks, the last year has shown that this can actually be a useful strategy.  Also, if you can stomach some extra volatility, penny stocks have shown considerable upside on a day-to-day basis. The vast majority of them typically pop and drop, so day trading is usually the flavor of the day when it comes to these cheaper names. But what do analysts think?

While I won't 100% advocate for Wall Street analysts and their ability to "pick stocks," I will say that they spend more time than the average person looking into the current platforms/business models of companies and pair that with the future potential they may (or may not) see. So, with this in mind, I took a moment and looked at a few penny stocks that analysts seem to like. You'll have to come to your own conclusions, of course. But, at the very least, it's some information to use during your diligence process.

Penny Stocks To Watch #1: Aerpio Pharmaceuticals

When it comes to finding penny stocks to buy, it doesn't hurt to look at news feeds first. Finding the source of momentum can help you determine the length of time you expect to be in a trade. Let's say a company just came out with a headline that they're reducing their debt. Think to yourself, "How long could this remain a catalyst, and what are the additional benefits that could come of it later on?" In this example, reducing debt may have less "staying power" than, say, a major acquisition or a pending product launch.

In the case of Aerpio (ARPO), the company just signed a definitive agreement to merge with Aadi Bioscience. Keep in mind that this news comes as ARPO shares have slid over the last few months. Whether it will be a "sell the news" event is yet to be seen. However, for now,d it seems to have been well-received by the market. Shares jumped nearly 50 cents from Friday's close to Monday's premarket high of $1.63. This new company will focus on advancing Aadi Bioscience's late-stage pipeline for genetically defined cancers with alterations in mTOR pathway genes. There will also be a $155 million PIPE financing to back the company in line with the deal. 

Looking at Aerpio after this deal, there are also several potential catalysts to look forward to this year. The foremost right now is the current rolling NDA submission for its FYARROTM treatment. Specifically, this is being designed to treat malignant perivascular epithelioid sarcoma, and it's expected to be completed in mid-2021. Preliminary data is also going to be presented at ASCO 2021. 

Where do analysts stand on ARPO stock right now? Of the most recent analyst coverage in the last year, BTIG Research and HC Wainwright follow the company. HC currently has a Hold on Aerpio, while BTIG gave a Buy and a $4 target at the end of 2020. Considering that this merger will effectively change the face of the company, it will be interesting to see if or when analysts revise their expectations based on the new focus.

Penny Stocks To Watch #2: Phunware

If you've followed industry and market trends recently, you're familiar with the surge in cryptocurrency interest. This has spilled over into the stock market as well. Companies focusing on everything from mining operations to NFTs have come into the spotlight. Phunware (PHUN) is in a bit of a unique situation when it comes to digital currency. In fact, the company's recent commentary from its quarterly update shed more light on future involvement when it comes to digital assets.

Alan S. Knitowski, President, CEO, and Co-Founder of  Phunware explained, "Not only have we commenced the full rollout of our blockchain-enabled Mobile Loyalty Ecosystem specific to PhunToken, PhunCoin, and PhunWallet as promised, but we have also executed a global distribution agreement with an anchor distribution partner that will be formally announced in the next several weeks. While we continue to work through what appears to be the final stages of the Covid pandemic operationally, we are both excited and comforted by the dramatic increase in business activity across all aspects of our software product and solution offerings for mobile, big data, and the cloud. Importantly, these encompass all three of our core growth engines rolling forward, including our MaaS cloud, our data-driven loyalty marketplace, and our secure, blockchain-enabled token, coin, and wallet capabilities."

This weekend was a rocky one for cryptocurrencies. However, in the case of Phunware, it has weathered the storm so far. Furthermore, analysts have begun to follow the company. Roth Capital initiated coverage this month, giving a Buy rating to the company. It also placed a $2.50 price target on the stock. Considering that PHUN shares trade around $1.30, that represents a sizeable upside if the analysts are correct in their outlook.

Penny Stocks To Watch #3: Atossa Therapeutics Inc.

Atossa (ATOS) is another name that analysts have followed. However, no new ratings have been given so far. The most recent firm that picked up coverage on the company was Maxim Group during the second half of last year. At the time, shares of ATOS stock were trading around the same prices as it is this week. Not only did Maxim give a Buy, but it also slapped an $8 target on the penny stock. Analysts at Ascendiant Capital also began following the company around the same time as Maxim. The firm gave a Buy along with a $7 target.

The core focus has been on Atossa's treatment pipeline. There's also been a COVID-19 twist added to the storyline. Final results from its Phase 1 clinical study using its drug candidate AT-301 was shown to be safe and well-tolerated. The treatment is being developed for at-home use for patients recently diagnosed with COVID-19. “During the first quarter of 2021, we continued our two key development programs, namely our Phase 2 study of oral Endoxifen for the ‘window of opportunity between diagnosis of breast cancer and surgery and our Phase 1 study of AT-301 nasal spray for at-home use for patients recently diagnosed with COVID-19,” said Dr.  Steven Quay, Atossa’s President, and Chief Executive Officer. "Combined with very encouraging results in our COVID-19 program with AT-301 nasal spray, we continued to make great progress over the quarter."

Given this progress, it will be interesting to see if ATOS remains a core focus for analysts this year. Needless to say, in light of positive data, it could be one of the penny stocks to watch right now.