Making Cents in Penny Stocks

The occasional shower of pennies from heaven might do our bank accounts some good. Alas, Fools can't say the same for penny stocks. They're often subject to manipulation and deceit, making it harder for investors to separate the few good offerings from the multitude best ignored.

Still, many investors enjoy dabbling at the low end of the stock-price spectrum. At Motley Fool CAPS, a "penny stock" is any stock trading under $10, and you'll find some of the best CAPS All-Stars regularly seeking out winning investments there. We identify them with a penny icon.

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 are three low-priced stocks enjoying All-Star support:

*Price when the outperform call was made.

The above three companies may be low priced, but that isn't necessarily enough to suggest they'll have an easier time recording big gains. Low-priced stocks are often low-priced for a reason. We have to check and see what their catalysts for growth might be before diving in to the shallow end of the stock pool.

Your two cents worth
Last week I noted that despite everyone holding hands and singing "Kumbaya" following the bank stress tests in Europe, we were nowhere near out of the woods when it came to the Eurozone financial crisis. Greece's economy is faltering and Slovakia reneged on its promise to bail it out. National Bank of Greece (NYSE: NBG) may be a Fool favorite right now, but there's a lot of risk there too.

And now Ireland is back in the news too. Bank of Ireland saw pre-tax profits fall 60% through the first six months of the year as commercial property loans it's selling to the government continue to falter. But because the Irish financial system is so stressed out, the government needs to keep funneling cash into the banks. It just raised the amount of money it's going to be able to give Anglo Irish Bank at the same time the government support programs are coming to an end. Ireland's Credit Institutions (Financial Support) Scheme expires next month while the Eligible Liabilities Guarantee Scheme is phased out by the end of the year. Allied Irish Banks (NYSE: AIB) has said the government needs to be "circumspect" in allowing the program to end, meaning they're looking for an extension. If funding is not extended, there will be billions in short-term debt without government guarantees and the massive reach of problems in the system continue to grow.

CAPS members generally seem to believe the government has little else to do but continue supporting its banking system. CPACAPitalist says all of Europe has a list of "too big to fail."

Hopefully I'm not getting in at a peak, but I think this one will keep moving up as Ireland gets a handle on its banks and the EU continues to backup institutions deemed "too big to fail"

A short circuit
Irish banks could probably use the same sort of support biopharmaceutical CombinatoRx received from Irish health care company Covidien (NYSE: COV) earlier this year. In March, it brought to market CombinatoRx's pain management drug Exalgo after receiving approval from the Food and Drug Administration and made a $40 million milestone payment to the biotech, which helped boost quarterly results.

It also got a half-million dollar payment in June for a pink-eye treatment from sanofi-aventis (NYSE: SNY), and stands to collect another $40 million if the drug succeeds in clinical trials and is approved. Royalties would then accrue to it afterwards. With a portfolio of prime drug candidates, CAPS member G311 CombinatoRx seems poised for growth, even with the risks inherent in the industry.

Possible windfall coming from pinkeye drug... could make this a doubler or tripler. Revenue growth in last year. Strong profit history. Income efficiency tops industry averages. Surging company in a new field. Good balance sheet. Sales up sharply last quarter. If even one of CRXX's new drugs succeeds, shares should soar well above the $1-$2 range.

Lack of communication
PDL BioPharma probably wishes it could count on its Genentech as much as CombinatoRx does its partners. The biotech received a letter from the Roche division essentially saying the technology they're using to make drugs such as its blockbuster treatment Avastin and paying royalties on, isn't actually the technology described in the patents PDL holds. Genentech didn't really say what it was going to do about the situation, but it was enough to spook the market as some one-third of PDL's annual revenues suddenly seem at risk. The stock was down 20% at one point on Friday.

CAPS All-Star member EnigmaDude thinks the big slide in the stock price was simply a market overreaction to the news: "Stock taking a huge hit today on dispute over royalty payments. Should bounce back."

According to PDL, Genentech isn't allowed to challenge the patents under a 2003 agreement, otherwise it faces substantial penalties.

Penny for your thoughts
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.