Making Cents in Penny Stocks

If it rained pennies from heaven, as Bing Crosby once sang, a few storms would sure do our bank accounts some good. But as Fools, we know that penny stocks are dangerous to our financial situation. Because the world of penny stocks is full of shysters peddling manipulation and deceit, it's often hard for investors to separate the few good companies residing there from the multitude best ignored.

Although many people like investing in penny stocks, believing that such stocks have a better chance of increasing many times in value, nothing says that a $20 stock can't double, triple, or quadruple in value just as easily as a cheaper one. Considering that a cheap stock may be cheap for a very good reason, there's ample evidence to suggest that higher-priced stocks may actually have a better chance of going up than cheap ones do.

Still, many investors dabble at the low end of the stock-price spectrum. At Motley Fool CAPS, we note the investors who, more than half the time, rate stocks trading in the single digits, and we give them a saucy name -- "Pennies." Believe it or not, you'll find some of the best CAPS All-Star investors among them.

Pinching pennies
This week, we'll look at some of the low-priced investments these All-Stars have praised or panned. If the best investors who regularly scan this end of the market have singled out these companies, we might want to turn our umbrellas upside-down -- or run for cover!

All-Stars believe that these low-priced stocks will outperform the market:

And here's a list of those they think will underperform:

As we delve into the low-priced "pennies," we find that most haven't generated much investor support; CAPS players have rated almost all of them at just one or two stars. Yet gold stocks still haven't lost their luster, since both Gammon Gold and Rubicon Minerals earn top CAPS honors.

Digital video recorder maker TiVo has been suffering, marked down by the market amid a growing field of DVR imitators. Yet a recent patent-office ruling validating TiVo's patents is not only a setback for rival EchoStar (NASDAQ:DISH), but may also bring TiVo ample royalty payments from others who have been making similar DVRs.

More than 800 investors have rated TiVo; 79% believe it will ultimately outperform the market. CAPS All-Star  spaeh1002  is one of them:

After the recent decision by the patent office, it looks like TIVO may be the only valid owner of patents for DVRs. Combined with licensing deals for using your PC as DVR (not setup boxes anymore...), the cash should start to flow in heavily. Also they rolled out a new version which is getting good reviews.

Another CAPS All-Star,  FoolishSojourn, sees future licensing deals boosting this technology company:

With the patent secure, they will be able to negotiate very good terms throughout this growing industry. Patent protection allows them to focus on the software and services side of the business which should lighten their business model and bring profits.

Make some change
There you have it -- some of the top CAPS investors' reasons why these "penny stocks" may or may not be a good investment. What do you think? Should we fill up the change jar with them, or ignore 'em like a discarded coin on the street? Consult our free Motley Fool CAPS investor intelligence community, where your opinion makes just as much cents -- er, sense -- as anyone else's.

Sign up today, and count the difference that investors helping investors beat the market can make for you.