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 (out of 5)

5-Year Return

Evergreen Solar (Nasdaq: ESLR  )

$9.38

***

369%

Force Protection (Nasdaq: FRPT  )

$3.91

***

244.4%

China Unicom (NYSE: CHU  )

$16.90

****

143.5%

Boots & Coots Well Control (AMEX: WEL  )

$2.89

*****

125.8%

Coldwater Creek (Nasdaq: CWTR  )

$6.49

***

102.2%

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 Ivanhoe Mines (NYSE: IVN  ) .

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, 31 stocks made the cut -- not including our last topper, infoGROUP. Let's move on to mineral rights holding company International Royalty (AMEX: ROY  ) , which has a small but strong following in our CAPS community:

Metric

International Royalty

CAPS stars (out of 5)

****

Total ratings

183

Bullish ratings

175

Percent bulls

95.6%

Bearish ratings

8

Percent bears

4.4%

Bullish pitches

23

Bearish pitches

2

Data current as of Aug. 27, 2008.

The thesis here is simple: Buy up mineral rights and collect income from whatever is extracted from its lands. "Mining royalty company that essentially invest in various mines and therefore collect a small percentage either of the ore that comes out or of the resulting income," wrote CAPS investor heym0n in June.

Jim Cramer was bearish on International Royalty last summer, and he was right. But now, with shares of International Royalty down more than 55%, I sense a bargain. I know that sounds crazy; shares of International Royalty trade for roughly 60 times normalized earnings. And yet, in the most recent quarter, per-share net income tripled. Royalty revenue was up more than 50%. Outstanding numbers like those will always command a premium multiple.

But that's my take. I'm more interested to know what you think. Would you buy shares of International Royalty 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 19,169 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. Here's how to try the service risk-free for 30 days.

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.


Read/Post Comments (2) | Recommend This Article (1)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 28, 2008, at 11:29 AM, jhatlarge wrote:

    Today FRPT is a penny stock, some months ago it was not when MF Rule Breaker recommended it at $20.00 - now its at $4.00 - thats - 8o% !!

    You fellows at MF are all over the map and when for marketing purposes you choose to pinpoint the bright side of your world notwithstanding that many of your subscribers who followed your recommendation are now in need of a flashlight! FRPT is certainly not a good example of MF acuity.

    A little less of blowing of MF's own horn and a little more due diligence regarding MF picks might be a good starting point.

  • Report this Comment On September 19, 2008, at 10:50 AM, 10qdetective wrote:

    Believe Spa Concept at Colwater is a waste of money and a poor distraction from core competence!

    http://10qdetective.blogspot.com/2008/09/coldwater-creek-suf...

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