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 those with the best chances of success by bestowing four- and five-star ratings on them. We just might want to turn our umbrellas upside-down to catch them!

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

Company

Recent Price

CAPS Rating (out of 5)

Return on Capital

Rentech (NYSE: RTK  )

$1.06

****

(2.8%)

RAIT Financial Trust (NYSE: RAS  )

$6.04

*****

N/A

Sonus Networks (Nasdaq: SONS  )

$3.00

****

(3.2%)

Source: Motley Fool CAPS; Capital IQ, a division of Standard & Poor's.

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
Like investors in CF Industries (NYSE: CF  ) and Mosaic (NYSE: MOS  ) , when fertilizer producer Rentech reported earnings in May, they should have been prepared for the coming fallout. All those sales and profits they were earning as a result of larger corn crops would eventually have the chickens coming home to roost.

When the USDA announced farmers planted some 300 million bushels more than what was predicted just three weeks prior to the report, marking a new record, shares of fertilizer stocks dropped. Corn prices were falling, dragging down wheat with them. It might seem incongruous since more corn planted should mean more fertilizer used, but it likely means with less profits to be had there will be less corn planted. That in turn will mean less fertilizer needed.

Like many investors, CAPS member TravisRcroteau is looking beyond just the fertilizer business and focusing also on the potential for its biomass gasifier plans:

As well as other on-going projects at Rialto and Port St. Joe. They have an attractive outlook with phased projects coming online in the next couple years. I believe this is a great opportunity to score an emerging stock at an unbelievable price.

Add Rentech to the Fool's free portfolio tracker then head over to the Rentech CAPS page and tell us if it's planted the seeds for growth.

Getting better all the time
Not the housing market, but rather the forces building up under the apartment rental industry. Housing is dead and homebuilders are zombies that just don't know it. We're not going to see any appreciable recovery in the industry for years to come because it wasn't allowed to correct itself so there's still a massive overhang of inventory out there.

So if people aren't buying houses but still need a place to live, that means they'll be turning to apartments as the next best thing. Because of its severely beaten down stock price, RAIT Financial Trust might represent an excellent opportunity.

Like peer UDR, RAIT is a REIT focused on the real estate financing market, but two-thirds of its portfolio is in multifamily properties. But unlike UDR, RAIT's properties are dispersed across the country, but with nearly 20% in Texas, which didn't experience the same level of price appreciation as other markets did during the boom. In contrast, UDR has 11% of its properties in Orange County, Calif., alone.

The housing crisis was particularly acute there, making apartments in the area even more attractive. As a result, UDR's shares have appreciated more than 30% over the past year. But RAIT is profitable compared to UDR's widening losses and its discounted price puts it in bargain territory.

CAPS member Speculatormaster thinks RAIT's management is making the right moves to deal with its debt burden:

Management seem focused in expand get more adquisitions and is raising some funds to make that adquisitions. Seem is aware of the debt and is dealing with that issue also. Real estate also is showing a very small improve, so for now is a matter of patience.

Add RAIT Financial Trust to your watchlist to track its progress for offering better multifamily living.

A good bet
One of the catalysts for voice and data infrastructure provider Sonus Networks is its position as a possible acquisition target. With Cisco (Nasdaq: CSCO  ) still reeling from the loss of market share and margin compression its experienced, the industry giant is often thought of as a likely candidate. And with Sonus posting consecutive losses now, its stock is getting cheaper and thus potentially more attractive, giving someone like Cisco a better lever to use against Acme Packet or Tellabs (Nasdaq: TLAB  ) .

The one holdback is Sonus' poison-pill defense, which would likely scare off any suitors. Highly rated CAPS All-Star tenmiles recently thought the expiration of the anti-shareholder friendly defense could help the situation, but management just moved to extend the rights agreement another two years. It says there hasn't been any particular interest in the company, but they want to remain entrenched.

All but one CAPS All-Star sees Sonus beating the Street, but you can track of what management is up to 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.

The Fool owns shares of and has created a bull call spread position on Cisco. Motley Fool newsletter services have recommended buying shares of Acme Packet and Cisco. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Fool contributor Rich Duprey owns shares of Cisco but does not have a financial position in any of the other stocks mentioned in this article. You can see his holdings here.


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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 July 18, 2011, at 1:04 PM, yazzbro wrote:

    RAS just reversed split their stock 1-3 hoping that the increase in price would draw more investers who stay away from Stocks that are less than $5. Well not so sure that worked. Since its reverse split, the stock has pretty much plummeted back into the $5. I have a feeling that if their earnings are nothing to write home about look for RAS to be right back where it started pricewise before the split.

    RAS seems to be hanging by a shoe string right now. I originally thought RAS was going to survive the Mortgage Crisis but, not so sure it will now. A couple more quarters of bad or average earnings and this company is pretty much done. Hopefully, RAS will come up with some stellar earning next week.

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