Making Cents in Penny Stocks

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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, often full of manipulation and deceit, makes it hard 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 does.

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 of 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. 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:

Company	Price*	CAPS Rating (5 Max)	Player	Player Rating
Opnext (Nasdaq: OPXT)	$5.80	****	dinasourneil	99.93
New Frontier Media (Nasdaq: NOOF)	$3.68	*****	vanamonde	99.90
Ballard Power Systems (Nasdaq: BLDP)	$4.05	*	Missletoe	98.94
Royal Bank of Scotland (NYSE: RBS)	$4.71	**	Zippidy1	98.93
Universal Insurance Holdings (NYSE: UVE)	$3.35	***	packerfan97	98.61

*Price when the outperform call was made.

As we delve into the low-priced "pennies," we find that the CAPS community, having given a rating of three stars or better, generally likes most of these companies. But as always, remember to do your own due diligence before buying or selling these for your own portfolio. After all, they could be cheap for a reason. Let's see why Universal Insurance shows up on this list.

Cold-rolled opportunity
Hurricanes and windstorms, let alone political posturing, are typical hazards facing property and casualty insurers in Florida. Universal Insurance has been weathering each of those storms and increasing the number of policies in force, though gross premiums have been declining since the state mandated rate cuts.

The state's regulations have been making it a challenge for insurers there, but attempts persist to have the federal government backstop Florida's insurance. However, many legislators and citizens balk at having taxpayers in Wisconsin, for example, ultimately bear the responsibility for insuring risk in Florida. Universal is attempting to diversify its risk by expanding into other markets, such as Georgia, Hawaii, Texas, and the Carolinas.

Investor JAVEROA is one of many responding to Universal's efforts to grow its business, even in the face of doubt about the industry: "This company has weathered the crisis in insurance quite well, despite its size and area of concentration. Its EPS and growth rate show it is undervalued due to the market's fear of insurance industry performance."

Others, including CAPS investor giftofgod, initially found the bear case persuasive but ultimately decided that Universal and Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) were too different to compare fairly:

At first I was disturbed by the top bear pitch. It was well-stated and sounded good on the surface. ... However, upon further investigation, I found that this company had only really begun to make money and grow in the last several years. You cannot compare a young insurance company with assets of $559million to Berkshire-Hathaway with assets of 269 BILLION. ... It is not unnatural for it to grow quickly. ... It would be impossible for Berkshire Hathaway to grow at this rate, but I would imagine that in its first few years it probably did.

You can read the top bear pitch for Universal Holdings yourself.

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.