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

Clean Harbors (Nasdaq: CLHB  )

$62.88

****

1,622.7%

Contango Oil & Gas (NYSE: MCF  )

$55.70

****

1,108.2%

Titanium Metals (NYSE: TIE  )

$10.55

*****

1,010.5%

Hub Group (Nasdaq: HUBG  )

$30.13

****

960.9%

GeoResources (Nasdaq: GEOI  )

$13.50

***

794%

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 Pacific Sunwear (Nasdaq: PSUN  ) .

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 doesn't exceed $2 billion, but is at least $250 million? Surely our new CAPS screener would return some winners, right?

This week, 40 stocks made the cut -- including our last topper, American Oriental Bioengineering. Let's move on to Gushan Environmental (NYSE: GU  ) , which has a strong following in our CAPS community:

Metric

Gushan Environmental

CAPS stars (5 max)

*****

Total ratings

550

Bullish ratings

528

Percent Bulls

97.3%

Bearish ratings

22

Percent Bears

2.7%

Bullish pitches

93

Bearish pitches

5

Note: data current as of November 5, 2008.

"Speculative Chinese biodiesel play; debt free with roughly 37% of market cap in cash; 10x forward earnings -- seems fair/cheap on valuation basis for patient longs, in spite of negative sentiment," wrote CAPS All-Star tenmiles in late September.

It's Earnings That Count author Hewitt Heiserman Jr. would appear to agree. Heiserman told those tuned in to the Fool's discussion board dedicated to his excellent book that he'd taken a "starter position" in Gushan for similar reasons. I've done the same. Gushan, trading for less than tangible book value but with a history of double-digit returns on invested capital, is simply too cheap to ignore.

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

Fool contributor Tim Beyers is also a member of the market-beating Rule Breakers team. Here's how to try this market-beating service risk-free for 30 days. American Oriental Bioengineering is a Hidden Gems pick. Titanium Metals and Pacific Sunwear are Stock Advisor selections. Pacific Sunwear is also a Hidden Gems Pay Dirt recommendation.

Tim owned shares of Gushan Environmental at the time of publication. The Motley Fool owned shares of American Oriental Bioengineering. Its disclosure policy was small and cuddly. Once.


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