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 (5 Max)

Five-Year Return

Turkcell (NYSE: TKC  )

$16.55

*****

478.7%

Gulfport Energy (Nasdaq: GPOR  )

$13.34

*****

334.6%

Wipro (NYSE: WIT  )

$11.58

****

180.4%

EMCORE (Nasdaq: EMKR  )

$6.19

*

111.3%

Ceragon Networks (Nasdaq: CRNT  )

$8.86

*****

101.4%

Sources: Motley Fool CAPS, Yahoo! Finance.

The promise of outrageous returns has made some of the world's best stock pickers penny stock investors from time to time. 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 Nu Skin Enterprises (NYSE: NUS  ) .

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, 34 stocks made the cut -- not including our last topper, International Royalty. Let's move on to China Nepstar Chain Drugstore (NYSE: NPD  ) , a drop-dead gorgeous stock that has a small but strong following in our CAPS community:

Metric

China Nepstar

CAPS stars (5 max)

*****

Total ratings

106

Bullish ratings

99

Percent Bulls

93.4%

Bearish ratings

7

Percent Bears

6.6%

Bullish pitches

8

Bearish pitches

0

Data current as of Sept. 2, 2008.

CAPS investor Baubble, who claims firsthand knowledge of the company, explained the thesis last November. I think that case is even stronger today:

China stocks are growing in value as the services rendered for the immense Chinese population grows. Healthcare in China is a mixture of traditional and western practices, and China Nepstar (the largest drugstore chain in mainland China) focuses on both these treatment modalities. As a Pharmacist who has spent extensive time in China, I see the future growth in this field as both necessary and logical.

I agree, and I'll add that cash on hand accounts for nearly 60% of China Nepstar's current market value. Tangible book value equals $4.04 per share, according to Capital IQ. With numbers like that, you'd think management was underperforming. Yet China Nepstar's return on equity has been rising rapidly since 2006, to its current 13.2%. I smell a bargain.

But that's just my take. I'm more interested to know what you think. Would you buy shares of China Nepstar Chain Drugstore 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, 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.

Fool contributor Tim Beyers, ranked 18,474 out of more than 115,000 participants in CAPS, is a member of the market-beating Rule Breakers team. Turkcell is a Global Gains pick. Ceragon Networks is a Hidden Gems recommendation. 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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