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 -- or run for cover!

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

And here's a list of those they think will underperform:

As we delve into the low-priced "pennies," we find that most of the companies, whether they're rated underperform or not, are generally well-liked by the rest of the CAPS community. Only solar products maker DayStar comes up with an unfavorable two-star rating.

Seeing daylight in solar energy
Anyone who's looked at the utility bill these days has probably, at some point, thought maybe a renewable source of energy might be a way to break through the monopoly chokehold the utilities have on consumers. Solar energy has certainly been the market darling, with many players in the industry seeing their stocks soar, and DayStar Technologies is no different. Its shares rose more than 67% in 2007.

Yet with all the development in solar energy under way, polysilicon -- the silicon crystal at the heart of most solar panels -- is experiencing an extreme shortage. Some companies, like Yingli Green Energy (NYSE: YGE), have entered into long-term contracts to ensure their supply of polysilicon. Some feel that DayStar has decided to go one better by forgoing the use of polysilicon in its products altogether, creating a more efficient, less expensive photovoltaic cell.

That's the reason top-rated CAPS All-Star KatWoman50, with a 92.67 player rating, gave as her reason for backing this promising technology:

Developer and manufacturer of breakthrough technology non-silicone photovoltaic cells on thin foil (CIGS). Unlike rigid silicone cells can be incorporated into all sorts of materials including building materials. CIGS requires 1/50th to 1/100th of the raw materials to manufacture, are flexible [and] self repairing and use no toxic materials. Modules cost $2/watt vs $4-5/watt for silicone. Still working on increasing production lines to Gigawatt scale. Have contracts with German firm Blitzstrom, [Chinese] company MEG and General Electric. They have some recent military contracts to develop product for lighter than air vehicles so are getting some R&D income.

Make some change
There you have it -- some of the top CAPS investors' choosing a number of "penny stocks" to beat or flag the market. 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.