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. The world of penny stocks is often full of manipulation and deceit, making it harder for investors to separate 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 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. 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 -- or run for cover!

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

Company

Price+

CAPS Rating (5 max)

Player

Player Rating

Miramar Mining (AMEX:MNG)

$6.24

*****

tuffsledding

99.91

OMNOVA Solutions (NYSE:OMN)

$4.20

****

altitudeaddict

99.14

Golden Star Resources (AMEX:GSS)

$4.15

*****

uvcmodel2007

99.05

Oilsands Quest (AMEX:BQI)

$4.12

****

zygnoda

97.88

Veraz Networks (NASDAQ:VRAZ)

$3.24

****

Tankota

97.24

+Price when the outperform call was made.

As we delve into these low-priced "pennies," we find that all of the companies are generally well-liked by the CAPS community, rated four stars or better.

A sticky situation
One of my favorite commercials growing up came from Chevron (NYSE: CVX  ) , portraying animated dinosaurs turning into oil wells which the company tapped. As a kid, I would imagine these massive animals getting trapped in tar pits and turning into fossils for modern fuels. Companies like Oilsands Quest don't actually drill in tar pits, but the pockets of oil they're hoping to exploit are called "tar sands." In reality, this term merely describes bituminous sand that has extra heavy oil trapped inside.

Its extreme viscosity makes this an expensive form of oil to extract and use. At lower price levels, it's not advantageous to try, but when the price of oil sits at $100 a barrel, oil sands make more economic sense. Canada, where Oilsands Quest owns properties, has the world's largest deposits of oil sands, along with Venezuela. With much of the "cheap oil" already tapped, more expensive forms like the oil-sands variety are becoming attractive.

That makes Oilsands Quest an interesting investment consideration, though simply looking at the financial statements might make you leery. There's been no revenue yet, since the company hasn't sold anything, but its permits are in place and development is continuing. For now, the company's all about future potential.

CAPS player deraj83 sees three possible outcomes: Oilsands Quest finally develops the properties, it gets bought out, or oil prices collapse and the land loses its value. Of all the possibilities, the last would seem least likely:

This company is sitting on huge oil sands reserves, but hasn't made a dime in revenue yet.... [T]here are only a few possible paths... 1) The company develops its own holdings-it would need to raise funds... 2) The company gets bought out... 3) The price of oil collapses below $40 a barrel, and the company's holdings are no longer worth developing.

Personally, I think the company will continue ... until the time comes to begin big spending on production. Then, when its valuation has ... jumped due to expectations of upcoming cash flows, it will sell to the highest bidder... [O]il prices ... [falling] so far as to jeopardize the company's future seems ridiculously remote from where we are today... Still, I regard [it] as a speculation stock, given zero sales and the fact that any of these scenarios will take years to play out.

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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