The Next Million-Dollar Penny Stock?

Penny stocks can make you rich.

Need proof? Every one of these multibaggers was, at one time, a penny stock:

Company

Recent Price

CAPS Stars

(5 Max)

Five-Year Return

ArcelorMittal (NYSE: MT  )

$98.40

*****

2,503.2%

Commercial Metals (NYSE: CMC  )

$37.44

*****

791.4%

Akamai Technologies (Nasdaq: AKAM  )

$34.16

****

595.7%

Immucor (Nasdaq: BLUD  )

$26.88

****

526.6%

Satyam Computer Services (NYSE: SAY  )

$24.38

*****

450.3%

Sources: Motley Fool CAPS, Yahoo! Finance.

The promise of outrageous returns is 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 110,000-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 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 new CAPS screener would return some winners, right?

This week, 28 stocks made the cut -- not including last week's topper, Taseko Mines. I'm still a fan, but, because it's a new week and a new column, I say we move on by giving Silicon Storage (Nasdaq: SSTI  ) the nod. With me? Good.

Let's start with the problems. Silicon Storage:

1.     Isn't a fast mover. (Expected to grow 10% a year over the next five.)

2.     Operates in a commodity market. (Flash memory.)

3.     Is under assault by a hedge fund. (Investor is seeking four board seats.)

Yuck.

Now, here's why the company -- to me, at least -- could be a candidate for our Motley Fool Hidden Gems service:

1.     Flash memory is a commodity, but a necessary one.

2.     Gross margins are rising -- a good sign in a commodity business.

3.     Co-founder Bing Yeh is still CEO and owns more than 10% of the company.

4.     Per-share tangible book value exceeds market value. Right now.

Silicon Storage also has a decent following in CAPS:

Metric

Silicon Storage

CAPS stars (5 max)

****

Total ratings

67

Bullish Ratings

61

Percent Bulls

91.0%

Bearish Ratings

6

Percent Bears

9.0%

Bullish Pitches

11

Bearish Pitches

1

Note: Data current as of June 27, 2008.

Count me among the bulls. Yes, I know, turnaround stories are inherently risky. With Silicon Storage, a fat cash position and tenured, heavily invested management increases the odds of success -- or, at worst, the odds of a premium buyout.

But that's my take. What's yours? Would you buy Silicon Storage 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, who is ranked 20,351 out of more than 110,000 participants in CAPS, is a member of the market-beating Rule Breakers team. Tim owned shares of Akamai, which is a Rule Breakers recommendation, at the time of publication. Satyam Computer is a Stock Advisor selection. The Fool's disclosure policy was small and cuddly. Once.


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