5 Top Penny Stocks

Ah, penny stocks. Quite possibly the world's most dangerous investments ... yet so enticing.

And for good reason. Some of the world's best stock pickers are, at times, penny-stock investors. Peter Lynch, for example, has and still does enjoy the stock market's super-cheap seats. The Royce Low-Priced Stock (RYLPX) fund crushes the market by betting on stocks trading for less than $10 a share. Even the All-Stars in our 100,000-strong Motley Fool CAPS investor-intelligence database dabble in penny stocks. More than a few have been richly rewarded.

Finally, there's our Motley Fool Hidden Gems small-cap service. You won't often find penny stocks on its scorecard, but Foolish colleague Tim Hanson studies rising microcap stars in a segment called Tiny Gems. Current Global Gains pick China Fire & Security (Nasdaq: CFSG  ) made Tim's list last August. Its shares have risen more than 30% since.

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 for less than $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? Surely our CAPS screener would return some winners. Let's have a look:

Company

Recent Price

CAPS Stars (5 Max)

Percent Bulls

Abraxas Petroleum (AMEX: ABP  )

$4.28

*****

96.4%

Webzen (Nasdaq: WZEN  )

$2.64

*****

94.3%

CommTouch Software (Nasdaq: CTCH  )

$3.90

****

95.8%

Descartes Systems

$3.67

****

95.7%

Harvard Bioscience

$4.86

****

89.7%

Sources: Motley Fool CAPS, Yahoo! Finance.

Bear in mind that this isn't a list of recommendations. Instead, I offer these stocks as candidates for further research.

My favorite, though, is Webzen, a Korean developer of online games, for many of the same reasons Tim liked China Fire & Security a year ago. Some of the notables:

  • Management is tenured and owns 12% of the outstanding shares.
  • Wall Street doesn't closely follow the stock.
  • Its shares, trading for less than nine times projected 2009 earnings, are cheap compared to regional industry peers NetEase (Nasdaq: NTES  ) and Sohu.com (Nasdaq: SOHU  ) .

And its market opportunity is still massive, according to CAPS investor s0pran0s. Here's how he pitched the stock in December:

Do you know how many registered users they have? [Editor's note: 56 million at last count.] With the recent money Activision (Nasdaq; ATVI) got, and a industry bigger than the movie industry, this is a great bet. Many companies will be interested in their online gaming technology, and to tap into all of their registered users.

I agree, but I'm even more interested in what you think. Would you buy Webzen 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 five more top penny stocks. Fool on!

Netease is a Rule Breakers recommendation. China Fire & Security is a Global Gains recommendation. Activision is a Stock Advisor selection. Try any of these market-beating services with a free 30-day trial. There's no obligation to buy.

Fool contributor Tim Beyers, ranked 15,711 out of more than 100,000 participants in CAPS, is a regular writer for Rule Breakers. He'd like to thank Foolish editor Brian Richards for his help with this column. Tim didn't own shares in any of the companies mentioned in this article at the time of publication. The Motley Fool's disclosure policy was small and cuddly. Once.


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