The Next Million-Dollar Penny Stock?

Penny stocks can make you rich.

Need proof? Every one of these multibaggers was once a penny stock:

Company

Recent Price

CAPS Stars (out of 5)

5-Year Price Change

Research In Motion (Nasdaq: RIMM  )

$129.59

***

3,508.1%

Guess? (NYSE: GES  )

$39.80

***

1,272.4%

Frontier Oil

$27.10

****

569.1%

Tesoro (NYSE: TSO  )

$22.06

****

470.8%

Eldorado Gold (AMEX: EGO  )

$8.15

****

280.7%

Sources: Motley Fool CAPS, Yahoo! Finance.

The promise of outrageous returns explains why some of the world's best stock pickers are, at times, penny stock investors. Peter Lynch has and still does enjoy the stock market's super-cheap seats. The Royce Low-Priced Stock fund crushes the market by betting on stocks trading for less than $10 a share. Even the All-Stars in our more than 105,000-strong 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 narrow those criteria to stocks with four- and five-star CAPS ratings whose market caps hover between $250 million and $2 billion? Surely our new CAPS screener would return some winners, right?

This week, 29 such stocks made the cut. Of the candidates, business intelligence specialist Actuate (Nasdaq: ACTU  ) intrigues me as an acquisition target. First Marblehead (NYSE: FMD  ) , though cheap, is struggling with market forces it can't control. But Taseko Mines (AMEX: TGB  ) may be just right.

Foolish colleague Christopher Barker best explains why in this take from last month. Quoting:

Taseko ... posted earnings and news this week that make the stock easy to love. Earnings before taxes rose nearly 41% year over year. Sales of copper concentrate rose 25% to 14.8 million pounds ... During the quarter, Taseko commissioned a new SAG mill (which grinds ore into smaller pieces) at the company's flagship Gibraltar Mine in British Columbia. The company also reported improved throughput volume of ore processed, as well as increased recovery rates from that ore. All of this resulted in a steady boost to copper production over the course of the quarter, from 3.3 million pounds in January to 5.5 million in March.

Such growth and efficiency are best purchased on the cheap. To CAPS All-Star shop1, Taseko presents exactly that sort of bargain. Quoting from our Fool's early June pitch:

Taseko Mines has a solid balance sheet, which is a plus in the current economic environment. The company has increased income, sales, net profit & EPS over the past year. ROE is decent at 10% and P/B is 2.96. Taseko has little debt & great cash flow, making it well positioned to continue expanding its business. With the demand for metals increasing, Taseko is a sound investment at an affordable price.

That's exactly the sort of stock I'm looking for. But that's me; I like cheap growers. What's your take? Would you buy Taseko Mines 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 Fool's 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, ranked 17,361 out of more than 105,000 participants in CAPS, is a member of the market-beating Rule Breakers team. First Marblehead is an Inside Value pick.

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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