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 the CAPS community has singled out as having the best chances of success by bestowing four- and five-star ratings on them. We just might want to turn our umbrellas upside-down!

Here are three low-priced stocks enjoying high CAPS support:

NM = not meaningful.

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 into the shallow end of the stock pool.

Your two cents worth
Biotech AEterna Zentaris is joined at the hip with Keryx Biopharmaceuticals (Nasdaq: KERX) through its colorectal cancer drug perifosine, which it licenses to the pharmaceutical. After receiving fast-track and orphan drug status from the FDA, Keryx has advanced the drug to phase 3 clinical trials, allowing it to join the numerous other therapies it has in late-stage development.

That sets AEterna apart from other biotechs like ImmunoGen (Nasdaq: IMGN), which has the vast majority of its drugs still in phase 1 testing, and Orexigen Therapeutics, which blew up after the FDA for all intents and purposes set the bar too high for it to get over. Analysts are looking for AEterna to rule the day.

Investors are also expecting the stock to go higher, even though it trades 50% above the level it was at a year ago. CAPS member HicAZ says the pipeline will keep it aloft; 98% of the CAPS members who have rated the company expect it to outperform the broad market averages.

Add AEterna to the Fool's free portfolio tracker then head over to the AEterna Zentaris CAPS page and add your opinion about where it's heading.

A tasty opportunity
Sensing weakness at networking king Cisco (Nasdaq: CSCO), upstart Brocade Communications has sought to carve out a place for itself in areas traditionally thought to be unassailable, like Ethernet switches. Now, an analyst suggests the niche could be further turned upside-down if Dell (Nasdaq: DELL) were to acquire Brocade specifically for its networking capabilities, an area the erstwhile PC maker has lacked.

The market researchers at IDC say PC sales will grow only 4.2% this year, down from previous forecasts of 7.1% as problems pile up, including slowing consumer buying trends, lackluster enterprise-level sales, economic malaise, supplier issues arising out of Japan's earthquake and tsunami, and dwindling government spending programs.

Dell could help offset its dwindling PC base by adding networking to the mix, and Brocade would be a prime target. CAPS member teamsack thinks the networking star is a solid financial performer:

They have a strong product line, and good financials. They are slightly overvalued, but still attractive. The one thing they should focus on is building a strong marketing campaign which of course showcases them as a company as well as their products.....and the cost/benefit of choosing and using their products vs. their competitors. I would like to see stronger revenue growth moving forward, and I believe other investors do too.

Follow along on whether Dell takes up the challenge by adding Brocade to your watchlist.

A good bet
Shallow-water driller Hercules Offshore has become a big fish in a small pond. A recent federal calculation estimates that only 14% of the Gulf of Mexico's recoverable oil remains under 800 feet of water and -- thanks to picking up the assets of a bankrupt Seahawk Drilling -- Hercules has become the largest shallow-water driller, operating around half the rigs there.

While it's also set up rigs elsewhere around the globe, the Gulf remains its biggest play. It might hurt its bottom line at the moment (Hercules has turned in three years of losses, obviously not all related to the BP oil spill), but assuming drilling returns to where it was earlier in the decade, Hercules will be poised to capture the lion's share of the business.

CAPS member vic713 thinks it was a shrewd move by Hercules to purchase Seahawk's assets and is convinced drilling will be resurrected in the Gulf. You can tell whether Hercules is succeeding by adding the stock to the Fool's free portfolio tracker and following along on its progress.

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? Consult our free CAPS investor intelligence community, where your two cents count as much as anyone else's.