Making Cents in Penny Stocks

If it rained pennies from heaven, as Bing Crosby once sang, a few storms would sure do our bank accounts some good.

But we Fools know that penny stocks are dangerous to our financial situation. Because the world of penny stocks is full of shysters peddling manipulation and deceit, it's often hard for investors to separate the few good companies residing there from the multitude best ignored.

Although many people like investing in penny stocks, believing that such stocks have a better chance of increasing many times in value, nothing says that a $20 stock can't double, triple, or quadruple in value just as easily as a cheaper one. Considering that a cheap stock may be cheap for a very good reason, there's ample evidence to suggest that high-priced stocks may have a better chance of going up than cheap ones do.

Still, many investors dabble at the low end of the stock-price spectrum. At Motley Fool CAPS, we note the investors who, more than half the time, rate stocks trading in the single digits, and we give them a saucy name -- "Pennies." Believe it or not, you'll find some of the best CAPS All-Star investors among them.

Pinching pennies
This week, we'll look at some of the low-priced investments these All-Stars have praised or panned. If the best investors who regularly scan this end of the market have singled out these companies, we might want to turn our umbrellas upside-down -- or run for cover!

All-Stars say these low-priced stocks will outperform the market:

And here's a list of those they think will underperform:

As we delve into the low-priced penny stocks, we see that most have not generated much investor support -- CAPS players have rated almost all of them at one or two stars. One company getting more attention, however, is Motley Fool Rule Breakers recommendation Panacos Pharmaceutical.

Last December, the company's top drug in tablet form failed in clinical trials and had to be reformulated. Shares suffered a severe decline after those test results. However, Panacos has since developed a liquid formulation that is a viable, second-best alternative for its HIV drug.

Analysts, though, are still cautious, thinking that tablets are more convenient than liquid oral dosages and thus must perform better in testing to compete successfully in the market against competitors' tablet drugs.

More than 250 investors have rated Panacos; 92% of them say it will outperform the market. The rationale behind the thinking is perhaps best summed up in a pitch from late last month by CAPS All-Star and Rule Breaker participant TMFBreakerJava, who sees encouraging reports in Panacos' HIV therapy progress.

Results from Phase II studies of Bevirimat continue to be encouraging. The news that a conveniently packaged liquid formulation has been developed is the next best thing to a viable tablet, which they are still working on. There is some concern about the long time it is taking to get Bevirimat through phase II, but the evidence for efficacy is there and the drug will eventually get to market and generate a lot of revenue for Panacos ...

CAPS player Ganndalf thinks Panacos needs some wizardry to succeed with Bevirimat, as he has noted.

For this drug to really do well commercially, it seems, based on my limited experience in biotech, that Bevirimat needs to have a tablet or capsule formulation. This may well happen, but I don't think one should expect it. At this time, my gut feeling is that chances are below 50% that they can find a tablet/capsule formulation for this drug. (But I MIGHT be wrong on this.)

So what is the bottom line? Panacos is very high risk right now, but if it looks like they've come up with a pill formulation that is working well in trials, I would seriously consider buying back into Panacos. It is a company well worth keeping an eye on in my opinion.

Make some change
There you have it -- some of the top CAPS investors' reasons why these penny stocks may or may not be a good investment. What do you think? Should we fill up the change jar with them, or ignore 'em like a head's-down coin on the street?

Consult our free Motley Fool CAPS investor intelligence community, where your opinion makes just as much cents -- er, sense -- as any other investor's. Sign up today, and count the difference that investors helping investors beat the market can make for you.