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.
This week, we'll look at two 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!
CAPS Rating (out of 5 max)
Return on Capital
|Amarin (Nasdaq: AMRN )||$7.55||****||(1%)||74%||NM|
|Apollo Investment (Nasdaq: AINV )||$7.06||****||(32%)||(2%)||5.5%|
Source: S&P Capital IQ, Yahoo! Finance; NM = not meaningful.
These two 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.
Hiding in plain sight
Seems fishy the U.S. patent office won't approve Amarin's fish-oil therapy to lower triglycerides for protection, but even though AMR-101 was rejected once again, analysts believe it will ultimately prevail.
The FDA accepted AMR-101's NDA in December, but the biotech has a bigger catch than that in mind. It wants the fish-oil treatment to also be used for the reduction of cardiovascular events like heart attacks and strokes. Amarin is enrolling patients in the trials, but waits for a decision on triglycerides, which is expected by July. Considering the FDA has said no advisory panel will be necessary to pass judgment on AMR-101, approval may come even sooner, allowing it compete against GlakoSmithKline's (NYSE: GSK ) Lovaza. Because of its safety profile, AMR-101 is likely to steal a large slice of market share from GSK, but the real potential is in those other indications it will be testing for.
That's one of the reasons management said talks about selling the company to a big pharma were premature. Perhaps if the bid were large enough, it might consider the offer, but the real opportunity still lays ahead for the biotech, and its low share price today may seem quaint when those prospects come closer to realization.
With shares down some 62% from their 52-week highs, I've rated Amarin on CAPS to outperform the market. The immediate catalyst will be FDA approval, followed by stealing share from GSK. We'll probably have a couple of years to wait for the other indications to move through the FDA's labyrinth.
Shining a light on growth
Business-development companies like Apollo Investment provide debt financing to businesses starved for cash or who are unable to obtain it through traditional means. BDCs gain preferential tax status by passing on most of their income to investors.
Apollo sports a healthy dividend that currently yields over 11%, one of its main attractions to investors. But chasing yield is a dangerous pursuit, and volatile markets can wreak havoc with such small companies. Industry peer American Capital (Nasdaq: ACAS ) was brought to the brink and ended up defaulting on its loans, even after suspending its dividend in 2008.
When it comes to Apollo, my colleague Dan Caplinger notes financials appear to be deteriorating. Yet, with the economy arguably gaining traction, the investments it's made may start paying off.
Despite all the economic turmoil, most BDCs came through the recession intact, just as Apollo has. The diversified asset base and requirement that they keep leverage manageable makes them a safer bet than many other financial institutions. As Motley Fool blogger Damon Judd notes, BDCs are prohibited from allowing total debt to surpass equity and total asset coverage is required to be at least 200%. Apollo has a debt-to-equity ratio of 75%, Ares Capital is 66%, and Solar Capital (Nasdaq: SLRC ) is 29%.
The company managed through the global financial crisis with very limited non-performing loans, but because of market volatility the stock was whipsawed. If you can whether some volatility, which would mitigated in a diversified portfolio, then this is a good stock choice for 2012.
Make some change
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