The Next Million-Dollar Penny Stock

Penny stocks can make you rich. Need proof? Every one of these multi-baggers was, at one time, a penny stock:

Company

Recent Price

CAPS Stars

(out of 5)

5-Year Return

Fuel-Tech (Nasdaq: FTEK  )

$11.49

*****

152.5%

Natus Medical (Nasdaq: BABY  )

$8.99

*****

132.9%

Smith Micro Software (Nasdaq: SMSI  )

$5.20

*****

116.7%

Rochester Medical (Nasdaq: ROCM  )

$11.10

****

136.2%

Ilumina (Nasdaq: ILMN  )

$37.22

***

945.5%

Sources: Motley Fool CAPS, Yahoo! Finance.

The promise of outrageous returns has periodically made even the world's best stock pickers penny stock investors. Peter Lynch has enjoyed the stock market's super-cheap seats in the past, and sometimes 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 Endo Pharmaceuticals (Nasdaq: ENDP  ) .

Even the All-Stars in our 130,000-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 CAPS screener would return some winners, right?

This week when I ran it, 74 stocks made the cut -- including our last topper, Thompson Creek Metals. We continue our commodities kick with a look at International Coal (NYSE: ICO  ) to see how it's attracting the bulls in our CAPS community:

Metric

International Coal

CAPS stars (out of 5)

****

Total ratings

681

Percent bulls

96.3%

Percent bears

3.7%

Bullish pitches

108 out of 112

Increased regulatory scrutiny of the industry has taken a toll on coal stocks. Environmental Protection Agency administrator Lisa Jackson has directed the agency to review as many as 200 new mining permits, voicing concerns over water pollution.

A depressed share price speaks to traders' nervousness over the Obama administration's coal crackdown. Yet Fools see a long-term opportunity in the selling.

"Smart Managers, solid company, strong insider buying, Spoke with some people associated with TVA...due to lower rainfall Hydro Plants are at 50% output, guess what is picking up the slack...their coal plants," wrote CAPS investor papa333 earlier this month. Continuing:

Obama says no to coal...can't happen, once investors realize this coal stocks will recover, also as oil goes up...and it will, coal will join in the run up. My favorite value pick ... As I read the report, I saw only one negative, their loan issue, and that was worked out.

And yet, trading for less than six times forward earnings and a 0.30 PEG ratio, this stock is priced for failure. But that's my take. I'm more interested to know what you think. Would you buy International Coal 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!

Each month, the Motley Fool Hidden Gems service spotlights promising micro-cap opportunities in a segment called Tiny Gems. Try this market-beating service risk-free for 30 days to find out what our penny stock sleuths are following now.

Fool contributor Tim Beyers didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. Natus Medical is a current Hidden Gems recommendation. Illumina is a Stock Advisor choice. The Fool's disclosure policy was small and cuddly. Once.


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