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

Terra Nitrogen (NYSE: TNH  )

$129.71

****

5,350.0%

True Religion (Nasdaq: TRLG  )

$26.57

**

1671.3%

Hurco Companies (Nasdaq: HURC  )

$31.00

*****

1,202.5%

W.R. Grace & Co. (NYSE: GRA  )

$22.86

***

578.3%

VASCO Data Security (Nasdaq: VDSI  )

$12.94

*****

313.4%

Sources: Motley Fool CAPS, Yahoo! Finance.

The promise of outrageous returns has lured the world's best stock pickers to become penny stock investors on occasion. 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.

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? Perhaps 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 ranges between $250 million and $2 billion? Surely our new CAPS screener would return some winners, right?

This week, 27 stocks made the cut -- not including our last topper, China Nepstar Chain Drugstore. Let's move to Secure Computing (Nasdaq: SCUR  ) , which, despite an ugly downturn that I failed to foresee, has a good-sized following in our CAPS community:

Metric

Secure Computing

CAPS stars (5 max)

*****

Total ratings

664

Bullish ratings

641

Percent bulls

96.5%

Bearish ratings

23

Percent bears

3.5%

Bullish pitches

93

Bearish pitches

6

Data current as of Sept. 9, 2008.

It's been an interesting seven days for Secure. Last week, it acquired privately held Securify for $15 million plus a $5 million earn-out. Then it closed a $65 million deal for its SafeWord authentication technology, which Aladdin Knowledge Systems (Nasdaq: ALDN  ) agreed to purchase in July.

I like the moves because (a) they strengthen Secure's balance sheet at a time when it needs cash, and (b) they bolster an already compelling technology vision based on pre-emptive strikes against digital malware.

CAPS investor ssgtballard likes Secure Computing's products and its customer list, writing last month:

Some of the best network security products available -- A large contract with DOD and current upgrades around the world and profit will increase. They make great decisions on aquiring smaller company's with good products.

Agreed, but I'm also more interested to know what you think. Would you buy shares of Secure Computing 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.

VASCO Data Security is a Stock Advisor pick. Hurco is a Hidden Gems recommendation.

Fool contributor Tim Beyers, ranked 17,862 out of more than 115,000 participants in CAPS, is a member of the market-beating Rule Breakers team. 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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