The primary takeaway for readers is that incorporating quality penny stocks into an investment portfolio can significantly enhance overall returns while managing risk effectively. This principle has always been at the core of many successful investment strategies. However, the performance of quality stocks fluctuates based on market conditions, and current indicators suggest that the U.S. stock market has entered a favorable period for quality investments. One major reason for this is the tendency of institutional investors, often referred to as 'smart money,' to gravitate toward quality stocks exhibiting stable profitability, robust cash flows, and solid revenue growth, particularly during uncertain times.

As of early April 2023, the U.S. stock market faces notable turbulence, primarily due to the ongoing implications of the Trump tariffs, which have injected considerable uncertainty into the market landscape. This volatility is reflected in the VIX index, a measure of market risk and investor sentiment, which is currently hovering at a value of 31more than 50% above its daily 200-day moving average. Such elevated volatility levels indicate a higher degree of market anxiety, prompting investors to seek refuge in quality stocks.

When it comes to penny stocks, the quality factor can be challenging to identify. Most penny stocks are characterized by unstable fundamentals, heightened volatility, and frequently weaker balance sheets, making the pursuit of quality a complex endeavor. Nevertheless, identifying quality penny stocks can yield a potent combination of high growth potential and attractive returns, alongside the resilience and consistency of growth that investors seek. The best quality penny stocks are poised to deliver significant growth even amid market downturns, often outperforming benchmark indices by substantial margins. Research conducted by leading academicians, including Asness, Frazzini, and Pedersen in their 2019 study, supports the notion that the quality factor has a favorable impact on stock returns.

Quality stocks typically exhibit high revenue growth, effective management practices, and a sustainable competitive edge, evidenced by double-digit returns on invested capital. The allure of quality stocks lies in their reduced volatility and defensive capabilities, enabling them to outperform the broader market during economic recessions or periods marked by significant uncertainty.

The quality factor in investing refers to companies that possess strong fundamentals, exhibit financial stability, and maintain a reliable performance history, with an emphasis on resilience rather than speculative growth. Several metrics can be used to evaluate quality stocks, as highlighted by Hsu, Kalesnik, and Kose in their 2019 research.

Recently, a list of the 11 Best Quality Penny Stocks to Buy According to Hedge Funds was published. In this article, we will explore how MannKind Corporation (NASDAQ:MNKD) measures up against some of the top quality penny stocks identified.

As we look forward, there are additional macroeconomic factors at play that may lead to a noticeable deceleration in GDP and earnings growth in the first half of 2025. Cuts in public spending, coupled with the ongoing uncertainty surrounding tariffs, present significant challenges for private spending and capital expenditures (Capex). As a result, corporate executives may be reluctant to make substantial investments when the economic outlook remains unclear. Consequently, it is anticipated that Q1 2025 earnings reports will reflect a sequential slowdown in growth.

According to FactSet Insight, the earnings growth for the U.S. stock market in Q2 2025 is projected at +7.2% year-over-year, which is significantly lower than the +18.2% growth reported for the previous four quarters of 2024. It is essential to note that actual growth figures could potentially fall short of the current +7.2% estimate.

Furthermore, the S&P 500 index remains below its daily 200-day moving average, a technical level often associated with market downturns. The last time the market dipped below this threshold was in January 2022, which precipitated a 12-month bear market characterized by a significant drawdown of -28%. Presently, the market is down approximately -13%, suggesting that the current correction may still have room to evolve. If the broader market continues to remain in negative territory, it is likely that investors will increasingly shift their focus toward high-quality stocks and penny stocks, thereby enhancing their valuations.

In summary, the insights outlined above bolster the thesis that the quality factor is likely to be favored in the coming months. This suggests that now may be a propitious time to consider investing in the best quality penny stocks.

Now, the question arises: Is MannKind Corporation (MNKD) the best quality penny stock to buy, as identified by hedge funds?

A close-up of a doctor's hand pressing on an inhaler illustrates the impact of MannKind's innovative therapeutic products.

Our Methodology

To identify the top quality penny stocks, we utilized a stock screener to filter companies with share prices under $5.00, a compound annual growth rate (CAGR) of at least 20% in revenue over the last five years, and a positive net profit margin. We then compared this list with our proprietary database detailing hedge fund ownership, selecting the top 11 stocks with the highest number of hedge funds holding shares as of Q4 2024. The stocks are ranked in ascending order based on hedge fund interest.

But why focus on stocks that hedge funds are investing in? The rationale is straightforward: our research indicates that mimicking the top stock picks of leading hedge funds can lead to superior market performance. Our quarterly newsletter employs a strategy that selects 14 small-cap and large-cap stocks each quarter, achieving an impressive 373.4% return since May 2014outpacing its benchmark by a remarkable 218 percentage points.

MannKind Corporation (NASDAQ:MNKD)

Revenue CAGR in the last five years: 38.86%

Net profit margin: 9.66%

Number of Hedge Fund Holders: 29

MannKind Corporation (NASDAQ:MNKD) is a biopharmaceutical company dedicated to the development and commercialization of inhaled therapeutic products tailored for endocrine and orphan lung diseases. Its flagship offering is an FDA-approved rapid-acting inhaled insulin aimed at adults with diabetes. Moreover, the company has developed a proprietary platform that ensures efficient deep-lung drug delivery. This platform is also being utilized for treatments related to pulmonary arterial hypertension, in collaboration with United Therapeutics.

In the fourth quarter of 2024, MannKind Corporation reported record revenues of $77 million, reflecting a 31% increase over the same quarter the previous year. Furthermore, the company achieved full-year revenues of $286 million, indicating a remarkable 43% growth compared to the previous year. MannKind has also demonstrated sound financial management by reducing its debt principal by $236 million in 2024, concluding the year with a robust cash reserve of $203 million. The endocrine business unit reported record revenues as well, with Q4 revenues reaching $23 million and annual revenues totaling $82 million.

MannKind is advancing several strategic initiatives, including an anticipated filing for a pediatric indication in the first half of 2025, with expected approval by early 2026. This development could propel sales of Afrezza, one of MannKind's critical products, to a projected annual run rate exceeding $200 million. Moreover, the clofazimine inhalation suspension program is progressing well, with 70% of sites already activated and patient enrollment on schedule for an interim readout in 2026. The collaboration on the TYVASO DPI project has proven successful, contributing to the first $1 billion product for United Therapeutics and showcasing the effectiveness of MannKind's Technosphere platform while providing necessary non-dilutive financing for further pipeline development. Overall, MannKinds expansive research pipeline enhances its position as one of the most promising penny stocks to consider.

In conclusion, MNKD ranks third on our list of the best quality penny stocks to buy as recommended by hedge funds. While we recognize the potential for MNKD to achieve substantial growth, we remain convinced that artificial intelligence (AI) stocks may present greater prospects for delivering higher returns within a shorter timeframe. Notably, there exists an AI stock that has increased in value since the beginning of 2025, while many popular AI stocks have experienced a loss of around 25%. For investors seeking promising AI stocks that trade at less than five times their earnings, we encourage you to explore our report on the most affordable AI stocks available now.

READ NEXT: 20 Best AI Stocks To Buy Now and 30 Best Stocks to Buy Now According to Billionaires.

Disclosure: None. This article was originally published at Insider Monkey.