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 for less than $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

American Capital (Nasdaq: ACAS  ) $8.03 **** 4.0%
Atmel (Nasdaq: ATML  ) $9.51 **** 26.9%
PDL BioPharma (Nasdaq: PDLI  ) $5.79 **** 130.6%

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

These three companies may be priced low, but that isn't necessarily enough to suggest they'll have an easier time recording big gains. Low-priced stocks are often that way 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
Do we really need another mortgage REIT? The folks at business development company American Capital think we do, as they recently IPO'd American Capital Mortgage at $20 a share. The market, however, wasn't quite so sure, and they were only able to sell 8 million shares instead of 17 million as they had planned, and as it trades at just above $18 a stub, it's a less-than-auspicious start.

Perhaps there just weren't enough attractive places for the mREIT's parent to put its money. The BDC reported second quarter earnings that despite being improved, saw little actual investment activity. Assets under management totaled almost $52 billion, but net investments were just $6 million, and that was just in add-on financing. Talk about keeping your powder dry.

While there might be fewer places to put money to work for BDCs like AmCap, Chimera Investment (NYSE: CIM  ) says mREITs have more attractive opportunities, and that may also have played into the launch of AmCap Mortgage. Annaly Capital's (NYSE: NLY  ) also spoke of a favorable environment for mortgage investments.

Although CAPS members like deaddog01 are patiently awaiting the reinstatement of AmCap's dividend, but management notes that since it no longer qualifies as a registered investment company, or RIC -- it's now treated as an S corporation for tax purposes -- it would be at least a year before it could qualify again. RICs forego paying taxes on ordinary income and capital gains that are distributed to shareholders as dividends.

So add American Capital to the Fool's free portfolio tracker to keep track of progress and let us know on the American Capital CAPS page whether it will be worth the wait.

Can't touch this!
Losing out to Cypress Semiconductor the chance to sell touchscreen control chips for the PlayBook and TouchPad may have been a blessing in disguise for chipmaker Atmel, particularly since Hewlett-Packard (NYSE: HPQ  ) announced it's abandoning the latter (did you catch those fire-sale $99 prices?). But let's be honest, the rest of the non-iPad tablet market isn't all that hot, either. It's really just a one-horse race.

But it's easy to get caught up in the flash and excitement of the smartphone and tablet markets. Atmel's biggest customer base is industrial users of its microcontroller technology, accounting for more than half of its revenues. Temperature sensors, motor controls, factory lighting, and smart energy meters actually contribute more to the top line than tabs and handsets.

CAPS member HunkaChunk finds Atmel the reigning leader of the microcontroller market.

King of the touch-screen controller, also doing well and growing margins in the microcontroller business, now they seem to have something that works they have a good possibility of future growth into other ancillary markets and presuming they can continue with their model that is currently working would seem to be well positioned.

Let us know on the Atmel CAPS page whether you'd touch this stock with a 10-foot pole.

A dime's worth of difference
It's said if you ask 10 economists their opinions, you'll get 11 different answers. Apparently, that works with scientists, too. How else can we explain the FDA interpreting clinical data to yank approval of breast cancer treatment Avastin while the European Medicines Agency, Europe's FDA equivalent, looks at the exact same data and expands its coverage?

That sort of confusion, though, hurt PDL BioPharma as sales were affected over doubt the agency created. Although Medicare said it would still pay for the drug regardless of what the FDA said, it was enough to pull PDL's sales down. Not even increased royalties from Elan (NYSE: ELN  ) and Biogen Idec for Tysabri sales could overcome that deficit.

With 95% of the CAPS members rating PDL to outperform the broad market averages, it's apparent they believe it will be able to overcome the reign of confusion brought on by the FDA.

Add 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 Motley Fool owns shares of Chimera Investment and Annaly Capital Management. Motley Fool newsletter services have recommended buying shares of Cypress Semiconductor and Elan. 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 does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here.


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