Making Cents in Penny Stocks

Low-priced stocks are often low-priced for a reason: They have significant problems to overcome. Yet for those that have fixed their problems, they 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 four- and 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

Estimated
5-Year EPS Growth

Return on Investment

Exide Technologies (Nasdaq: XIDE  ) $3.01 **** (58%) 13% 3.8%
Taseko Mines (NYSE: TGB  ) $2.61 **** (44%) 11% 1.7%

Sources: 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. 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.

Getting a charge out of it
If a company could triple its earnings without growing revenues in the least, that would be a fairly major accomplishment. A recent Forbes article said that lead-acid battery maker Exide Technologies thinks it can do just that as it expands operating margins to the high single digits over the next few years. At least that's the plan. If it were so easy, everyone would be doing it, but while Exide did just post a fourth-quarter loss attributable to rising input costs, it was narrower than the year-ago period, and operating income jumped 70% as it was able to gain control over its restructuring plan and impairment charges.

Perhaps the biggest thing weighing on Exide was the warm winter we experienced in many parts of the country. Aftermarket batteries account for more than two-thirds of its transportation segment revenues, which itself accounts for 62% of total sales, so not being able to move as much product this winter -- think of all those old DieHard battery commercials -- made it particularly acute. It's also something likely not to be repeated too many times.

The other component of Exide's business is its industrial segment, which provides forklifts and such to customers like Wal-Mart and Target, and network backup power supply systems for telecoms like AT&T (NYSE: T  ) and Verizon. Industrial didn't fare as well last quarter, as unfavorable pricing as well as internal operational issues held it back.

So while the problems confronting Exide are addressable -- and should it gain the upper hand on them, it ought to make good on its promise to broadly expand margins -- now's the time it needs to show that it can.

Earlier this year, I bet that Exide's turnaround efforts would pay off, and I continue to anticipate that it outperforms the broad indexes on CAPS. But you can add Exide to your own Watchlist and then tell me in the comments section below or on the Exide Technologies CAPS page whether you think the battery maker will jump-start its turnaround.

Out of time
I've also been counting on seeing copper and molybdenum miner Taseko Mines execute a 180-degree U-turn, but I'm starting to think there are some deeper problems here. In the fourth quarter, it suffered a 39% drop in copper concentrate sales volume but laid the problem off as simply a timing issue on shipments. Now that first-quarter numbers have come out, it's once again blaming shipment timing as the culprit for the 6% drop in sales.

Taseko did have a number of problems to go along with the timing issues, including the shutdown of one of its mills, but it also had difficult "ore characteristics" along with difficult weather to contend with. At least it says the copper shipment that was supposed to have gone out at the end of March before the quarter's end finally made it out the door in April and should bolster second-quarter finances.

Copper now trades at about the same price it did six months ago, a situation that affects not only Taseko but also Freeport-McMoRan (NYSE: FCX  ) and Teck Resources (NYSE: TCK  ) , which also will find it difficult to go forward on lower-grade copper projects. Teck might face a squeeze at its Chilean Quebrada Blanca site, because it's a low-grade, high-tonnage mine that needs either higher prices or sustained demand to support it -- neither of which seems to be happening in the current economic environment. And that seems to augur ill for Taseko, too.

I've rated the copper miner to outperform the market on CAPS, joining with almost 1,900 other members, or 98% of those weighing in, who see it beating the Street. But persistent delays, lower quality output, and reliance on "timing" issues to excuse disappointing results will ultimately wear thin. Let us know on the Taseko Mines CAPS page whether you agree this assessment also, and then put its stock on the Fool's free portfolio tracker to see whether it's just going through the motions.

Make some change
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Fool contributor Rich Duprey holds no position in any company mentioned. Check out his holdings and a short bio . The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Motley Fool newsletter services have recommended creating a diagonal call position in Wal-Mart Stores. The Motley Fool has a disclosure policy. We Fools don't 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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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 June 16, 2012, at 9:42 AM, rtichy wrote:

    Rich,

    I have been following Exide for a long time (since they came out of bankruptcy), and I am surprised that management has lasted this long. Do you have any thoughts on exactly how the management team has been fortunate to keep their jobs this long?! I guess things were looking pretty good for them in early 2011, but the drop that followed that has been severe! They always seem to indicate that costs surprised them. First it was contracts to but lead that were too high...

  • Report this Comment On June 16, 2012, at 9:58 AM, rtichy wrote:

    but=buy

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