The Next Million-Dollar Penny Stock?

Penny stocks can make you rich.

Need proof? Every one of these multi-baggers was, at one time, a penny stock:

Company

Recent Price

CAPS Stars (out of 5)

5-Year Return

Oilsands Quest (AMEX: BQI  )

$4.15

****

4,511.1%

Cleveland-Cliffs (NYSE: CLF  )

$94.18

***

3,349.8%

SBA Communications (Nasdaq: SBAC  )

$33.39

**

1,136.7%

GigaMedia (Nasdaq: GIGM  )

$11.83

*****

600%

Astronics (Nasdaq: ATRO  )

$23.56

*****

523.3%

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 near or below $10 a share, including Gammon Gold (AMEX: GRS  ) .

Even the All-Stars in our 115,000-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 -- including our last topper, Himax Technologies. Let's move on to database marketing specialist infoGROUP (Nasdaq: IUSA  ) , which has a small but strong following in our CAPS community:

Metric

infoGROUP

CAPS stars (out of 5)

****

Total ratings

52

Bullish ratings

47

Percent bulls

90.4%

Bearish ratings

5

Percent bears

9.6%

Bullish pitches

5

Bearish pitches

1

Data current as of Aug. 20, 2008.

All-Stars are even more bullish on the company; 17 of the 18 All-Stars who have rated infoGROUP say it's a buy. NASAGeek, rated in the top 7% of our community, is encouraged because Joel Greenblatt's "Magic Formula" listed infoGROUP in one of its screen results at the end of June.

I'm modestly skeptical. I also agree with CAPS investor BillMcNeal, who wrote last November: "People just don't want to be bothered over dinner. Do Not Call and other initiatives make business much more difficult, although demand for marketing services will remain strong."

And yet, when it comes to the investing thesis for infoGROUP, I can't get past three statistics. First, each dollar of revenue commands just $0.39 in market value. Second, insiders own more than 40% of the business. And third, infoGROUP's return on invested capital, at 11.6%, is at a peak not seen since 1996. Bullish signs, all.

But that's my take. I'm more interested to know what you think. Would you buy shares of infoGROUP 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 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 18,946 out of more than 115,000 participants in CAPS, is a regular contributor to Fool.com and is a member of the market-beating Rule Breakers team. Get access to all of his writings here.

GigaMedia is a recommendation of the Global Gains and Rule Breakers services. Try either of them free for 30 days. There's no obligation to subscribe.

Tim owned shares of Astronics at the time of publication. The Motley Fool's disclosure policy was small and cuddly. Once.


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