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. Because the world of penny stocks is often full of manipulation and deceit, investors can have a tough time separating its few good offerings from the multitude best ignored.

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 members.

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.

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

*Price when the outperform call was made.

Your two cents' worth
Despite cutting its near-term production goals, Yamana Gold still expects to hit a sustainable 2 million ounces of gold a year by 2012, by boosting production closer to the goal date. The gold producer had been expected to churn out somewhere between 1.1 million and 1.2 million ounces this year, but Yamana said that forecast has been scaled back to 1.05 million ounces.

Some analysts view the revised goals as more realistic and see Yamana as a relatively low-cost producer able to produce strong cash flows. That's an assessment CAPS member libertynut would undoubtedly agree with, since he finds the gold miner strong on a fundamental basis, though knocked back because of economic fears.

October 2008: The gold sector beatdown from de-leveraging hedge funds won't last forever. With central banks trying their darndest to keep the paper price down (try to take delivery on some physical gold right now without waiting 4-6 months), and Uncle Ben firing up the printing press (read: inflation ahead), the inevitable rebound will send gold through the roof. Yamana will at the head of the pack; it has some solid fundamentals (increasing dividends, little debt), is dirt cheap right now.

Airlines such as UAL, Delta (NYSE:DAL), and Southwest Airlines (NYSE:LUV) have been reeling from high fuel costs, so it was something of a cruel irony that this time, the dropping price of oil prolonged the pain in the industry. Fuel hedges put in place to protect airlines from rising costs created losses as oil has plummeted from its highs. Yet UAL was able to beat expectations when it posted a loss far smaller than what was forecast. While the airline achieved that surprise by cutting capacity, CAPS member uclayoda87 sees the demand destruction that has occurred this summer as ultimately dooming airlines.

We have seen demand destruction for gasoline this summer, when gasoline broke $4 per gallon. When fuel prices go back up and businesses look to cut costs, business travel will be curtailed. This leaves vacation travel, which may also be economized due to multiple factors such and unemployment, increased cost of living and uncertainty about the future.

Fewer flights with higher costs and demand destruction will lead to less revenue. Unions will only make this worse, so airline failures and consolidation I believe are inevitable.

CIT Group is another stock beaten back as a result of the markets being roiled. It dropped by more than a third last week after reporting an expanding loss. But CAPS member ajfuchs finds the benefits outweigh the disadvantages as he enumerates both sides of the argument. You can read the full pitch on the CAPS page for either CIT Group or ajfuchs.

4) no bad news on last Q call and release Oct 16.

5) massive stock over-reaction in the face of total systemic lack of confidence.

6) Tangible book in the 14-15 range after large write downs. Obviously unclear how much more write down may be coming IF the crisis gets worse than today but at current level no massive TB impairment expected.

7) Fully financed with no need to access market for 12-16 months.

8) Opportunity to buy back debt at depressed levels needs to be tempered by desire to keep a lot of dry gun powder (cash) on the balance sheet.

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? It pays to start your own research on these stocks on Motley Fool CAPS. Read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made -- all from a stock's CAPS page. Consult our free CAPS investor-intelligence community, where your two cents count as much as anyone else's.