Making Cents in Penny Stocks

The occasional shower of pennies from heaven might do our bank accounts some good, but we Fools can't say the same for penny stocks. The world of penny stocks is often full of manipulation and deceit, making it harder for investors to separate its few good offerings from the multitude best ignored. Though some investors think cheaper stocks have a greater chance to appreciate, those stocks may be cheap for a reason. Indeed, a $20 stock may have even better chances of gaining value than a $0.20 one.

Still, many investors dabble at the low end of the stock-price spectrum. At Motley Fool CAPS, we award the "Pennies" title to investors who rate stocks trading in the single digits more than half the time. Believe it or not, you'll find some of the best CAPS All-Stars among those players.

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 regularly scanning this end of the market have singled out these companies, we might want to turn our umbrellas upside-down -- or run for cover!

Here's the latest list of low-priced stocks with All-Star support:

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

As we delve into the low-priced "pennies," we find that most of the companies, whether they are rated underperform or not, are generally not too well-liked by the CAPS community overall. None has a rating higher than the average three stars.

Mortgaging the future
It's not surprising to see housing-related companies on the list of penny stocks in which CAPS All-Stars lack confidence these days. Whether they're dealing with homebuilders like Meritage, mortgage brokers like IndyMac, or investors in mortgages like E-Trade, All-Stars reflect the concerns of an industry still beset by falling value.

IndyMac Bank has begun ratcheting back its estimates for its projected return to profitability. Back in September, the lender's CEO said it would be "solidly profitable" by the fourth quarter, but he changed that tune in November to suggest that IndyMac might struggle into 2008. Just last month, he updated his prediction yet again, to say that "if all goes well, we can return to modest profitability sometime in the second half of 2008."

That sort of dubious guidance leads CAPS investors like MJKpayday to see the lender sliding even further off the rails:

More fall out to be had. And to the outperformers talking of being greedy when others are fearful and negative publicity from the news pundits as an indicator to buy, not sell - Both shoes are falling off this dummy and we're only half way there so give it some more patience, before you call out the green.

Make some change
What do you think? Should we fill up the change jar with these penny stocks, or ignore 'em like a discarded coin on the street? Consult our free Motley Fool CAPS investor-intelligence community, where your two cents count as much as anyone else's.