The Next Million-Dollar Penny Stock

Penny stocks can make you rich. Need proof? Every one of these multibaggers was once a penny stock:

Company

Recent Price

CAPS Stars
(out of 5)

5-Year Return

ON Semiconductor (Nasdaq: ONNN  )

$7.76

*****

143%

Smith Micro Software (Nasdaq: SMSI  )

$11.62

****

196%

The Knot (Nasdaq: KNOT  )

$10.70

***

206%

Tata Communications (NYSE: TCL  )

$19.78

***

178%

AspenBio Pharma (Nasdaq: APPY  )

$1.89

**

163%

Sources: Motley Fool CAPS, Yahoo! Finance.

The promise of outrageous returns has periodically made even the world's best stock pickers penny stock investors. Peter Lynch has enjoyed the stock market's super-cheap seats in the past, and still does on occasion. The Royce Low-Priced Stock fund has beaten the market for a decade by betting on stocks trading near or below $10 a share, including RC2 (Nasdaq: RCRC  ) .

Even the All-Stars in our 140,000-plus Motley Fool CAPS community take to penny stocks. More than a few have been richly rewarded.

Pennies from heaven
So why not invest in penny stocks? Well, the warning the SEC issued about them provides one excellent reason to steer clear. But what if we take the agency's definition literally, and limit our choices to stocks trading between $1.50 and $5 a share? And what if we further seek only four- and five-star stocks with a market cap between $250 million and $2 billion? Surely our CAPS screener would return some winners, right?

This week when I ran that screen, 55 stocks made the cut -- including our last topper, CapitalSource.

My favorite penny stock this week is E*TRADE Financial (Nasdaq: ETFC  ) , a rebounding broker that most CAPS investors like. Today's details:

Metric

E*TRADE Financial

CAPS stars (out of 5)

****

Total ratings

2,661

Percent bulls

94%

Percent bears

6%

Bullish pitches

617 out of 643

Data current as of Oct. 1.

There are good reasons to like E*TRADE. Look at the insider action, for example. Executives and other insiders have been mostly buying shares over the past year. Recent sales belong to Citadel Advisors, a significant shareholder but not an insider in the purest sense of the word.

Other Fools like E*TRADE because of its assets, and because sidelined money is gearing up to get back into the Great Stock Market Game. As TMFeatnbybears put it in a pitch from earlier today:

They have home loans ... those will firm up. Money from the sides will come into brokerage. Lots of trading going on compared to last year. Expect 50-100% gain.

Do you agree? Would you buy E*TRADE at today's prices? Let us know by signing up for CAPS today. It's 100% free to participate.

More millionaire-making Foolishness:

Each month, our Motley Fool Hidden Gems service spotlights promising micro-cap opportunities in a segment called Tiny Gems. Try this market-beating service risk-free for 30 days to find out what our penny stock sleuths are following now. The Knot is a Motley Fool Rule Breakers pick. RC2 is a Motley Fool Hidden Gems selection. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool owns shares of CapitalSource and is also on Twitter as @TheMotleyFool. Its disclosure policy was small and cuddly. Once.


Read/Post Comments (3) | Recommend This Article (16)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 06, 2009, at 4:18 PM, doandrew wrote:

    I am not sure about ETFC.

  • Report this Comment On October 06, 2009, at 4:19 PM, doandrew wrote:

    i AM NOT SURE ABOUT ETFC.

  • Report this Comment On October 14, 2009, at 4:13 AM, SIRIDoom wrote:

    The following has bee censored 5 times from Seeking Alpha:

    ----Sell

    SIRI is going to 38 cents when the rev-split ratio is announced.

    Censoring negative opinions on stocks is abusive media manipulation and a violation of Free Speech. I suggest everyone refuse to use such web sites. Seeking Alpha should be avoided

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