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 as Fools, we 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 higher-priced stocks may actually 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.

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

Meanwhile, they've marked these penny stocks to underperform:

As we delve into low-priced "pennies," we find that the All-Stars we highlight here are not the only ones who like -- or dislike -- the prospects these companies face. SORL Auto Parts, for example, has attracted quite a following on CAPS. Nearly half the investors who've rated the company are All-Stars, and not one of them thinks it will underperform.

Top-rated CAPS investor hondo928 thinks the right catalyst will propel the air-brake-valve manufacturer higher:

Probably my favorite Chinese stock. [I]t's only up 18% and is drastically off the [highs]. [M]aybe I'm a little contrarian and speculative on this one but following the [herd] is a sure way to underperform, on the way up and fall harder on the way down. P/E is 13 and PEG is .55. [I]f this stock can get a catalyst maybe a good earnings report or a law that helps them you got a [double] on your hands. [Heck] maybe more.

Those numbers pique the interest of fellow All-Star Gtrinvestor, though he warns about its cash position:

I ran across this stock while investigating Tata Motors (NYSE:TTM) (they recently signed a deal to supply Tata Motors w/ parts)...

The only thing I would say that the company needs to improve on is cash management. With the capital spending that is ramping up, they are also letting working capital get out of hand. While A/P has gone up only slightly in the past 2 years, A/R has about tripled, which is a formula for a quick cash squeeze. SORL has avoided the cash crunch by issuing more shares, but that sort of dilution may not be desirable given its current deflated stock price. However, at these low stock prices I may consider putting a few dollars into this one for my personal portfolio.

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 discarded 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.

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