Making Cents in Penny Stocks

The occasional shower of pennies from heaven might do our bank accounts some good, but we Fools can't say the same for penny stocks. Because the world of penny stocks is often full of manipulation and deceit, investors can have a hard time separating its few good offerings from the multitude best ignored. Though some investors think cheaper stocks have a greater chance to appreciate, those stocks may be cheap for a good reason. Indeed, a $20 stock may have even better chances of gaining value than a $0.20 one.

Still, many investors dabble at the low end of the stock-price spectrum. At Motley Fool CAPS, we award the "Pennies" title to investors who rate stocks trading in the single digits more than half the time. Believe it or not, you'll find some of the best CAPS All-Stars among those players.

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 regularly scanning this end of the market have singled out these companies, we might want to turn our umbrellas upside-down.

Here's the latest list of low-priced stocks with All-Star support.

Company

Price*

CAPS Rating (out of 5)

Player

Player Rating

DRDGOLD (NASDAQ:DROOY)

$7.26

**

JUDGEJOSEPH

93.71

Sirius Satellite Radio (NASDAQ:SIRI)

$2.81

**

shreeshubh

93.06

Exelixis (NASDAQ:EXEL)

$7.10

****

nickzero

81.36

Chico's FAS (NYSE:CHS)

$7.24

***

RazorInvestor

96.43

Skyworks Solutions (NASDAQ:SWKS)

$7.42

***

iaburky02

87.90

*Price when the player made the outperform call.

As we delve into the low-priced "pennies," we find that most of the companies seem to be a generally well-liked bunch in the CAPS community, since most of them have a rating of three stars or better. Let's take a closer look at Skyworks Solutions to see why some of our CAPS players might like it.

A sky-high valuation?
Skyworks manufactures and sells parts used in cell phones. Three original equipment manufacturers, including Motorola (NYSE: MOT  ) , accounted for 50% of revenue in 2007 at Skyworks Solutions, making the implosion of handset sales there a warning bell for investors. Yet where Motorola has seen cell-phone sales fall, Samsung and Sony Ericsson -- the other two of the triumvirate -- have reported that handset sales were pushing their business higher. Samsung called handset sales a "savior" that pushed segment revenue higher by 6% last quarter and fueled a 42% jump in unit sales for the year. Similarly, the joint venture between Sony and Ericsson (Nasdaq: ERIC  ) saw its market share increase 38% in 2007, according to the market researchers at IDC. 

It's true that analysts aren't expecting handset growth to ring up much in sales in 2008, but the doom and gloom that some may fear for Skyworks may not materialize.

CAPS All-Star iaburky02 sees Skyworks as having advantages its rivals do not, so that it can profit while the competition still records losses. "Continues to win business from all of the leading cell phone [manufacturers] and is turning a profit, when most of their competitors can't do the same," iaburky02 says.

As CAPS player rock7839 notes, Skyworks is working to diversify away from cell-phone handsets, although those devices do still play a prominent role in its fortunes.

Company has increased Gross Margin in a competitive market by gaining greater efficiencies. They are also successfully diversifying away from the handset market where there is less competition. In addition, they are positioned well for the next big handset push when 3G Mobile phones gain momentum. Lastly Skyworks provides components to IPHONES which should provide some growth for the next 3-5 years.

Make some change
What do you think? Should we fill up the change jar with these penny stocks, or ignore 'em like a discarded coin on the street? Consult our free Motley Fool CAPS investor-intelligence community, where your two cents count as much as anyone else's.


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