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 (5 Max)

Five-Year Return

Goodrich Petroleum (NYSE: GDP  )

$39.45

**

757.6%

Jinpan International (Nasdaq: JST  )

$31.50

*****

625.3%

U.S. Global Investors (Nasdaq: GROW  )

$8.25

****

572.9%

Meridian Bioscience (Nasdaq: VIVO  )

$29.17

*****

623.6%

Natus Medical (Nasdaq: BABY  )

$22.28

*****

396.2%

Sources: Motley Fool CAPS, Yahoo! Finance.

The promise of outrageous returns may explain 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, such as Korn/Ferry International (NYSE: KFY  ) .

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, Dennison Mines. Let's move on to Chinese casino operator Melco PBL Entertainment (Nasdaq: MPEL  ) , which has a strong following in our CAPS community:

Metric

Melco PBL Ent.

CAPS stars (5 max)

****

Total ratings

988

Bullish ratings

951

Percent Bulls

96.3%

Bearish ratings

37

Percent Bears

3.7%

Bullish pitches

175

Bearish pitches

6

Data current as of Sept. 30, 2008.

Why so many ratings? Melco is a Global Gains recommendation, picked by Bill Mann a little over a year ago. From his original thesis:

Think you know the world's largest destination for gambling? Las Vegas, hands down. Right? Actually, no. It's Macau. The country's reversion to Chinese rule in 1999, coupled with its position as the only place in China where gambling is legal, have added to its explosive growth, and in 2006, Macau generated $6.95 billion in gambling revenues, surpassing Las Vegas for the first time ... Melco PBL is a pure play on the gaming market of Macau.

Intrigued? Me too, even more thanks to CAPS All-Star TMFDeej, who says the stock is still a buy. Quoting from his June pitch:

One stock that I really like right now is Melco (MPEL). It operates casinos in Macau. Think Las Vegas in China, but bigger. MPEL has been performing remarkably well lately and it is just becoming profitable, yet it has been hurt by the general sell-off in casino and Chinese stocks lately. Even if MPEL's earnings don't rise as quickly as many analysts estimate, and I personally think that they will rise even faster with its new City of Dreams project close to being complete, the currency effect of the yuan rising versus the dollar should be enough to generate outstanding returns for investors.

Agreed, but I'm more interested to know what you think. Would you buy shares of Melco PBL Entertainment 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 23,987 out of more than 115,000 participants in CAPS, is a member of the market-beating Rule Breakers team. Here's how to try this market-beating service risk-free for 30 days. Jinpan and Natus Medical are Hidden Gems picks. Melco is a Global Gains 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.


Read/Post Comments (1) | Recommend This Article (3)

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  • Report this Comment On October 05, 2008, at 10:45 PM, matthewbanis wrote:

    lost thousands on this stock, when and if it goes under 3 though, i'll buy more.

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