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 three 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

Dean Foods (NYSE: DF  ) $9.72 **** 5.3%
Pacira Pharmaceuticals $7.31 ***** (64.3%)
Sequenom (Nasdaq: SQNM  ) $4.19 **** (55.5%)

Score is by how many percentage points that pick is beating the S&P 500.

The above three companies are low-priced, but that isn't necessarily enough to suggest that 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.

Hiding in plain sight
The milk business is not noted for its generous margins, and rising commodity costs have pressured dairy farmers' ability to survive. As part of the consolidation under way in the industry, Dean Foods, one the country's largest dairy providers, purchased tiny Foremost Farms in 2009, a move it said would help Wisconsin dairy farmers maintain a stable outlet for their milk. The Justice Department said the reduction of four dairy farms to three was anticompetitive and forced Dean to sell the fluid-milk operations from its Fresh Dairy Direct division this past September.

That's the same division Dean just had to take a huge, $1.9 billion goodwill impairment against. The recession and competitive pricing have cut into volumes of milk sold, and FDD, which represents 85% of Dean's revenues, was no longer worth what it once was. It distributes both branded and private-label dairy products, including milk, ice cream, and creamers.

Grocery chains such as SUPERVALU  (NYSE: SVU  ) and Safeway (NYSE: SWY  ) have passed along the higher costs to branded consumer goods, since it makes their own private-label brands look more attractive, but they've been feeling the pinch of rising costs, too, and their own margins are coming under pressure.

More than 90% of the CAPS members rating Dean Foods think the dairy processor has not only got milk, but also has what's necessary to beat the broad market indexes. Let us know in the comments section below or on the Dean Foods CAPS page whether you think the impairment will spoil everything, and then add it to your watchlist to see whether it pulls it off.

No pain, no gain
Shares of Pacira Pharmaceuticals have been on the decline since getting FDA approval for its postsurgical painkiller Exparel. (Insert record-scratch sound here.) What? Yep, the drugmaker, using its proprietary DepoFoam delivery system, gained approval to market the extended-release formula of bupivacaine, but shares have fallen more than 25% since the announcement.

That might be tied to the decision to sell the drug to hospitals rather than individual practitioners, because the institutions are deemed a harder sell. However, Pacira says it's still targeting surgeons, anesthesiologists, pharmacists, and nurses, but the sales teams can cover more ground in a hospital than by hitting individual offices.

Not that it won't be an easier sale, since bupivacaine is already commonly used with plastic bags and catheters, but Pacira needs to make its mark soon, as others are looking to exploit the same area. Durect (Nasdaq: DRRX  ) , for example, is testing an extended-release patch of bupivacaine called Eladur, using its own unique delivery system. But there's also some promise of branching out with the DepoFoam, too, as Pacira is partnered with Novo Nordisk (NYSE: NVO  ) to explore using it for other drug-delivery systems.

CAPS member PharmaD is bullish based on the Exparel approval, but how about you? Put Pacira Pharmaceuticals on your watchlist, and let us know in the comments section below whether you think it will gain traction with its strategy.

Buckle up
With the dark past behind it, Sequenom can look forward to greater growth now that its MaterniT21 Down syndrome test has hit the market. It began selling the test last month, so while its third-quarter results showed better sales as a result of its MassArray technology -- it has a growing installed base of machines that lead to greater consumables use -- the MaterniT21 test should be the bigger driver going forward.

Still, losses, while narrowed to $0.19 a share, were a penny worse than Wall Street's forecasts, which had the market sending Sequenom's shares down. No matter: CAPS member unkownuser sees the Down syndrome test being huge as well.

So my feeling is that now that detection has been reduced to the level of simple blood work, more and more women outside the high risk category will be requesting the screening as a "just in case" measure.

What this means is that Sequenom's extremely conservative estimate of potential sales, which includes only the 750,000 births yearly to those women in the high risk category; could balloon into something much much bigger.

Add the biotech to the Fool's free portfolio tracker and tell us on the Sequenom CAPS page when you think it will start testing new highs.

Fool contributor Rich Duprey owns shares of Dean Foods, but he holds no other position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of SUPERVALU and Dean Foods. Motley Fool newsletter services have recommended buying calls in SUPERVALU. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.


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