The Next Million-Dollar Penny Stock

Penny stocks can make you rich.

Need proof? Every one of these multibaggers was, at one time, a penny stock:

Company

Recent Price

CAPS Stars (out of 5)

5-Year Return

True Religion (Nasdaq: TRLG  )

$12.58

**

1,023.2%

Force Protection (Nasdaq: FRPT  )

$5.46

***

468.8%

Spartan Stores (Nasdaq: SPTN  )

$23.22

***

381.7%

Hologic (Nasdaq: HOLX  )

$12.39

*****

189.5%

McDermott International (NYSE: MDR  )

$8.76

****

123.5%

Sources: Motley Fool CAPS, Yahoo! Finance.

The promise of outrageous returns is why some of the world's best stock pickers are, at times, penny stock investors. Peter Lynch has enjoyed the stock market's super-cheap seats (in fact, he still does). The Royce Low-Priced Stock fund has beat the market for a decade by betting on stocks trading near or below $10 a share, including Foundry Networks (Nasdaq: FDRY  ) .

Even the All-Stars in our 125,000-plus Motley Fool CAPS community take to penny stocks. More than a few have been richly rewarded.

Pennies from heaven
So why not invest in penny stocks? I suppose because the SEC has warned us about them. But what if we take the agency's definition literally and limit our choices to stocks trading between $1.50 and $5 a share? And what if we further limit our choices to four- and five-star stocks whose market cap doesn't exceed $2 billion, but is at least $250 million? Surely our new CAPS screener would return some winners, right?

This week when I ran it, 71 stocks made the cut -- including our last topper, ARM Holdings. Let's move on to Orthovita (Nasdaq: VITA  ) , which has a small but bullish following in our CAPS community:

Metric

Orthovita

CAPS stars (out of 5)

****

Total ratings

117

Bullish ratings

108

Percent bulls

92.3%

Bearish ratings

9

Percent bears

7.7%

Bullish pitches

15

Bearish pitches

1

Data current as of Dec. 27, 2008.

Orthovita has the members of our Rule Breakers community intrigued because of the way its technology improves complex surgeries such as spinal repair. All-Star investor TMFBreakerJava added the stock to his CAPS portfolio in May and has seen a 70-point gain since.

"This company is steering Cortoss toward FDA approval. Cortoss is a cement that can be used to patch bone and which tends to promote bone regrowth until the bone grows into the Cortoss and replaces it. Being tried out by orthopedic surgeons. If it works the upside is large," he wrote at the time.

In September, the FDA granted Orthovita's request for additional time to supply data in an ongoing clinical study of Cortoss' effectiveness. That’s a bullish sign -- bullish enough that the Essex Woodlands Health Venture funds have been buying shares in bulk since at least October.

I think they'll be handsomely rewarded. But that's my take. I'm more interested to know what you think. Would you buy Orthovita at today's prices? Let us know by signing up for CAPS today. It's 100% free to participate.

See you back here next week with another penny stock from heaven. Fool on!

On Jan. 12, 2009, Fool co-founder David Gardner, Jeff Fischer, and their Motley Fool Pro team will accept new subscribers to their real-money portfolio service. Motley Fool Pro is investing $1 million of the Fool’s own money in long and short positions in a range of securities, including common stocks, put and call options, and exchange-traded funds. They also incorporate proprietary CAPS "community intelligence" data into their research. To learn more about Motley Fool PRO and to receive a private invitation to join, simply enter your email address in the box below.

ARM Holdings is a Stock Advisor selection.

Fool contributor Tim Beyers didn't own shares in any of the stocks mentioned in this article at the time of publication. Check out his portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy was small and cuddly. Once.


Read/Post Comments (3) | Recommend This Article (30)

Comments from our Foolish Readers

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 December 29, 2008, at 3:56 PM, solitaire77 wrote:

    Wait a second? When was Hologic a penny stock? Not in the last five years (the return period cited).

    To get back under a dollar a share, one has to look further back and ignoring two or three splits.

    Did the author forget to account for splits?

  • Report this Comment On December 29, 2008, at 4:14 PM, TMFMileHigh wrote:

    Hello Solitaire77. I'm going by the SEC definition and that used by the Royce Fund ($10 or less). Stocks trading near or below $5 a share currently, for this column, qualify as penny stocks. Historically, we look for less than $10 per share combined with a small market cap. Hologic traded for less than $5 per share after splits in 2003 and less than $10 a share, pre-split, in its debut year of 1990.

    Hope this helps some and Foolish best,

    Tim (TMFMileHigh)

  • Report this Comment On January 05, 2009, at 1:13 PM, solitaire77 wrote:

    Oh my. I've been trading in penny stocks and didn't know it.

    Thanks for responding. Best,

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