Making Cents in Penny Stocks

Low-priced stocks are often priced low for a reason: They have significant problems to overcome. Yet those that have fixed their problems may be ready to take off to the next level.

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 five-star ratings on them. We just might want to turn our umbrellas upside-down to catch them!

Company

Recent Price

CAPS Rating (out of 5)

1-Year Return

Est.
5-Yr. EPS Growth

Return on Investment

Brocade Communications (Nasdaq: BRCD  )

$4.72

****

(27%)

10%

3.1%

TriQuint Semiconductor (Nasdaq: TQNT  )

$5.56

****

(56%)

13%

4.1%

Source: FinViz.com, Motley Fool CAPS.

These two companies may be low-priced, but that isn't necessarily enough to suggest they'll have an easier time recording big gains. Remember -- they're 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.

Getting bigger by going smaller
I've mentioned a few times now my displeasure with Dell (Nasdaq: DELL  ) changing its mission from computer maker to IT "solutions provider." It hasn't been able to make inroads against industry giant Cisco (Nasdaq: CSCO  ) , and despite its acquisition of data center specialist Force10 Networks, it hasn't been able to execute to plan, which has led to disappointing quarterly results.

All of this makes the possibility of a new acquisition all the more likely as it tries to shore up its division. Brocade Communications, an oft-discussed potential target, still looks like the most likely candidate. Considering Brocade has an activist investor agitating for a shakeup at the company, including its possible sale, I'd say a hook-up looks promising. With weak IT spending from enterprise level customers for the rest of the year likely for Dell, buying growth might be the only way to pull itself out of its doldrums.

It might also help Brocade perform better in its Ethernet market, which hasn't been able to gain traction, even its attempt to create an intelligent base for cloud-optimized networking has been lackluster. With 96% of the CAPS All-Stars rating Brocade seeing it outperforming the broad indexes, it's apparent they think that either as a stand-alone company or an acquisition target, Brocade will succeed.

Tell us on the Brocade Communications CAPS page or in the comments section below your thoughts on the takeover chatter, then add it to your watchlist to be notified of developments as they arise.

Amplifying the effect
Power amplifier maker TriQuint Semiconductor is another that has found its sea legs, but in this turbulent market has been anchored by analyst speculation that it's lost some of its business with Apple (Nasdaq: AAPL  ) .

TriQuint just reported first-quarter earnings that saw revenues dip 3%, but witnessed an 85% plunge in profits from the year-ago period. The market also didn't take kindly to its dour second-quarter guidance, where it forecast revenues well below the consensus estimates. While it blames the falloff on its largest customer, which is essentially Apple, I've maintained it's actually a presage for even more business from the company.

Apple's last iPhone upgrade was last October, and Qualcomm is reporting difficulty keeping up with demand for new chips. Between the rumored fall launch of the new iPhone 5 and TriQuint's CEO expecting the back half of the year to be strong, I'm saying the weakness exhibited by TriQuint's stock is an opportunity.

I've rated the chip maker to outperform the market on CAPS because of that, and sOnTheIsle seems to agree with my thesis that TriQuint "will get a nice bump from iPhone 5 this fall. Stock buyback in effect." Let us know on the TriQuint Semiconductor CAPS page if you agree with this assessment, then put its stock on the Fool's free portfolio tracker to see if it's just going through the motions.

Make some change
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Fool contributor Rich Duprey owns shares of Cisco Systems and Apple, but he holds no other position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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