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

Excel Maritime Carriers (NYSE: EXM  )

$21.85

****

1,961.3%

Cal-Maine Foods (Nasdaq: CALM  )

$34.46

****

922.6%

LMI Aerospace (Nasdaq: LMIA  )

$23.20

****

866.7%

Olympic Steel (Nasdaq: ZEUS  )

$33.81

***

668.4%

Yamana Gold (NYSE: AUY  )

$8.56

****

226.7%

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.

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, 23 stocks made the cut -- not including our last topper, Secure Computing. Let's move on to uranium producer Denison Mines (AMEX: DNN  ) , which has a good-sized following in our CAPS community:

Metric

Denison Mines

CAPS stars (5 max)

*****

Total ratings

468

Bullish ratings

452

Percent Bulls

96.6%

Bearish ratings

16

Percent Bears

3.4%

Bullish pitches

75

Bearish pitches

1

Data current as of Sept. 16, 2008.

Denison isn't an easy pick, because the numbers, frankly, aren't that good. Return on invested capital, while improving, remains negative. Gross margin is down. Free cash flow is nonexistent. Why Dennison and not Cameco (NYSE: CCJ  ) or another uranium miner? For the answer, let's turn to CAPS investor LEGMAKER and his June pitch:

Long term, there is a different story for uranium. There is a supply and demand issue developing as usage is increasing, while production is having trouble keeping up. Currently, nuclear generates 15% of the world's electricity. This is accomplished by 439 nuclear reactors. There are 34 under construction with more than 90 in planning. The main reason for the demand is its cost. The reactors are much more expensive to build, but the cost of nuclear is even cheaper than coal without the pollution. Using cost per Kwh in 2006, oil was $9.63, gas was $6.75, coal $2.37, and nuclear $1.72. The Uxc estimates that demand will outstrip all production .... in 2014.

Color me impressed. But that's my take; I'm more interested to know what you think. Would you buy shares of Denison Mines 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 Fool's 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, who is ranked 21,218 out of more than 115,000 participants in CAPS, 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.


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