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 Industries (NYSE: TRA  )

$21.12

****

751.6%

Cleveland-Cliffs (NYSE: CLF  )

$27.19

***

657.4%

ViroPharma (Nasdaq: VPHM  )

$11.31

*****

291.3%

PetroQuest (NYSE: PQ  )

$8.53

***

270.9%

AspenBio Pharma (Nasdaq: APPY  )

$4.80

***

242.9%

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 Dendreon (Nasdaq: DNDN  ) .

Even the All-Stars in our 120,000-member 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, 54 stocks made the cut -- including our last topper, Exelixis. Let's move onto American Oriental Bioengineering (NYSE: AOB  ) , which has a strong following in our CAPS community:

Metric

American Oriental Bioengineering

CAPS stars (5 max)

*****

Total ratings

2,092

Bullish ratings

2,035

Percent Bulls

97.3%

Bearish ratings

57

Percent Bears

2.7%

Bullish pitches

284

Bearish pitches

10

Data current as of Oct. 30, 2008.

Shares of this Chinese maker of plant-based pharmaceuticals are down more than 30% since Fool Bill Mann recommended it to Motley Fool Hidden Gems subscribers. From his original write-up:

I believe that fortunes will be made by patient investors in this market. And [American Oriental] has all the hallmarks of being the right company with the right leadership. And right now, it's cheap.

And it still is. American Oriental Bioengineering traded for roughly 1.5 times tangible book value and eight times trailing earnings as of yesterday's close. You'd think that growth had stalled completely. But it hasn't. Revenue and normalized net income are up 55% and 47%, respectively, over the past year. Management's return on invested capital remains comfortably in the double digits. Sounds to me like a business worth buying.

CAPS All-Star jinchoice agrees. Quoting from our Fool's September pitch for American Oriental:

Having lived in Korea, I'm familiar with the way Asians view their traditional medicine. With their increased wealth, the Chinese will ever be more health conscious, and they will start spending their money on traditional medicines that benefit their overall health even when there is no ailment. AOB is the biggest player in a very fragmented market. They will grow through acquisitions, and in time, I hope that their brand will be recognized in China. The Chinese will associate brand names with safety, and that should give AOB a great edge in the market.

Agreed, but I'm interested in what you think. Would you buy shares of American Oriental Bioengineering 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 didn't own shares in any of the companies mentioned in this article at the time of publication. American Oriental Bioengineering is a Hidden Gems pick. Exelixis is a Rule Breakers pick. The Motley Fool owns shares of both American Oriental and Exelixis. Its disclosure policy was once small and cuddly.


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