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 Rating

(5 Max)

Five-Year Return

AK Steel (NYSE: AKS  )

$54.07

***

1,453.7%

Range Resources (NYSE: RRC  )

$65.60

****

1,436.3%

TeleTech Holdings (Nasdaq: TTEC  )

$17.97

****

351.5%

Enersis S.A. (NYSE: ENI  )

$15.55

*****

260.0%

Global Industries (Nasdaq: GLBL  )

$15.37

****

209.3%

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 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, 33 stocks made the cut -- including our last topper: Silicon Storage. So let's move on to a stock that Foolish colleague Rick Munarriz called a worthwhile buy in January, at greater than $4 per share: CDC (Nasdaq: CHINA  ) .

The stock has struggled as  business has put up uninspiring numbers, including a small loss in the most recent quarter. And that's with a 21% improvement in revenue.

Nevertheless, our CAPS community mostly favors CDC:

Metric

CDC Corp.

CAPS stars (5 max)

****

Total ratings

802

Bullish ratings

763

Percent Bulls

95.1%

Bearish ratings

39

Percent Bears

4.9%

Bullish pitches

137

Bearish pitches

7

Data current as of July 15, 2008.

Enthusiasm for China probably has a lot to do with that rating. But the numbers aren't bad, either. CDC trades for less than 18 times next year's earnings. Cheap? No, but not expensive, either, if the company produces the online gaming hit investors are hoping for.

"To be honest, this stock will either stay in a rut and continue to trade between $3.50 and $5 or it will move up and surpass its 52-week high," wrote CAPS investor mcnasty91 in April. "I'm venturing on the latter, they have the number one online game in special force, which COULD be the next CounterStrike. This company simply has too much upside to be this low and if it takes off watch out!"

Agreed. But what do you think? Would you buy CDC Corp. at today's prices? Let us know by signing up for CAPS today. It's 100% free to participate.

See you back here Friday with another penny stock from heaven. Fool on!

Each month, the Motley Fool 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.

Tim Beyers, who is ranked 20,974 out of more than 110,000 participants in CAPS, is a regular contributor to Fool.com and is a member of the market-beating Rule Breakers team. He 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 once small and cuddly.


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