The Next Million-Dollar Penny Stock

Penny stocks can make you rich.

Need proof? Every one of these multibaggers was, at one time, a penny stock:

Company

Recent Price

CAPS Stars
(5 Max)

5-Year
Return

Terra Industries (NYSE: TRA  )

$14.80

****

369.8%

SBA Communications (Nasdaq: SBAC  )

$14.72

*

323%

VASCO Data Security (Nasdaq: VDSI  )

$10.38

*****

311.9%

ViroPharma (Nasdaq: VPHM  )

$11.47

*****

309.6%

Natus Medical (Nasdaq: BABY  )

$12.86

*****

222.3%

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 AnnTaylor Stores (NYSE: ANN  ) .

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, 76 stocks made the cut -- including our last topper, CapitalSource. Let's move on to Silver Wheaton (NYSE: SLW  ) , which has a bullish following in our CAPS community:

Metric

Silver Wheaton

CAPS stars (5 max)

*****

Total ratings

1,309

Bullish ratings

1,272

Percent Bulls

97.2%

Bearish ratings

37

Percent Bears

2.8%

Bullish pitches

198

Bearish pitches

7

Data current as of Nov. 28, 2008.

CAPS All-Star krazycanuck put it this way recently:

"The recent manipulation of the silver price has artificially depressed it and the supply of physical silver has DRIED UP as ppl see an undervalued metal, and buy as much as they can get (which isn't much because most don't want to sell at artificially depressed prices), and buyers are paying premiums in some cases more than 50% above spot when they can find any at all! If this isn't evidence of price manipulation, what is?"

I can't speak to that, but Foolish colleague Christopher Barker can. His analysis shows Silver Wheaton could be trading for as little 3.4 times forward earnings. "It turns out investors really are paying just over $1 per ounce of silver in the ground," he wrote last week.

Is that too cheap to ignore? It sure seems like it, but I'm more interested to know what you think. Would you buy shares of Silver Wheaton 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 also contributes to the market-beating Rule Breakers service. VASCO Data Security is a Stock Advisor selection. Natus Medical is a Hidden Gems pick. CapitalSource is an Income Investor recommendation.

Tim didn't own shares in any of the stocks mentioned in this article at the time of publication. The Motley Fool owned shares of CapitalSource. Its disclosure policy was small and cuddly. Once.


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