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

Graham (AMEX: GHM  )

$18.50

****

981.9%

Illumina (Nasdaq: ILMN  )

$25.14

***

721.6%

NutriSystem (Nasdaq: NTRI  )

$11.22

****

520.9%

CyberSource

$11.13

**

192.9%

Lions Gate (NYSE: LGF  )

$7.20

***

122.9%

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, such as Sigma Designs (Nasdaq: SIGM  ) .

Even the All-Stars in our 120,000-plus 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 falls between $250 million and $2 billion? Surely our new CAPS screener would return some winners, right?

This week, 52 stocks made the cut -- including our last topper, Melco PBL Entertainment. Let's move on to Exelixis (Nasdaq: EXEL  ) , which has a strong following in our CAPS community:

Metric

Exelixis

CAPS stars (5 max)

*****

Total ratings

2,181

Bullish ratings

2,107

Percent Bulls

96.6%

Bearish ratings

74

Percent Bears

3.4%

Bullish pitches

337

Bearish pitches

15

Data current as of Oct. 22, 2008.

But this stock comes with heavy risks. GlaxoSmithKline (NYSE: GSK  ) this week said it would end its collaboration with Exelixis without licensing any additional compounds. Exelixis, for its part, says it is talking with other firms. At least one CAPS All-Star, zzlangerhans, hasn't given up hope. Quoting from last week's pitch:

Ah, Exelixis. You've broken so many hearts over the years. With your ever-widening and never-lengthening pipeline, sometimes you seem like you're already the biotech subdivision of a large pharmaceutical company. Is that what your dream is? Now that your cap is below 400M you may finally achieve it. I finally see a price I like, and I'll let myself be seduced again with my eyes on the prize of being your master.

Poetic? Sure. Realistic? I think so. Exelixis needs just one hit, just one goal, to make its investors a small fortune.

But that's my take. I'm more interested to know what you think. Would you buy shares of Exelixis 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!

Fool contributor Tim Beyers recently returned from a tour of Silicon Valley with his Rule Breakers teammates, during which they visited more than a dozen established and emerging innovators, including Exelixis. Care to learn more? Just tell us where to send you our updates. It's 100% free.

Tim didn't own shares in any of the companies mentioned in this article at the time of publication. Exelixis is a Rule Breakers pick and a Motley Fool holding. The Fool's disclosure policy was small and cuddly. Once.


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