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)

5-Year Return

Almost Family (Nasdaq: AFAM  )

$42.43

***

840.8%

NutriSystem (Nasdaq: NTRI  )

$14.41

****

700.6%

Graham (AMEX: GHM  )

$8.64

****

390.9%

Bolt Technology

$7.63

*****

196.9%

GigaMedia (Nasdaq: GIGM  )

$4.42

*****

112.5%

Sources: Motley Fool CAPS, Yahoo! Finance.

The promise of outrageous returns has lured some of the world's best stock pickers, at times, into the ranks of penny stock investors. Peter Lynch has and still does enjoy the stock market's super-cheap seats. The Royce Low-Priced Stock fund has beat the market for a decade by betting on stocks trading near or below $10 a share, such as Netgear (Nasdaq: NTGR  ) .

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 hovers comfortably between $250 million and $2 billion? Surely our new CAPS screener would return some winners, right?

This week, 81 stocks made the cut -- including our last topper, Silver Wheaton. Let's move on to Bare Escentuals (Nasdaq: BARE  ) , a Rule Breakers pick with plenty of bullish followers in our CAPS community:

Metric

Bare Escentuals

CAPS stars (5 max)

****

Total ratings

407

Bullish ratings

379

Percent Bulls

93.1%

Bearish ratings

28

Percent Bears

6.9%

Bullish pitches

65

Bearish pitches

8

Data current as of Dec. 2, 2008.

As CAPS investor SmartNChic wrote two years ago:

I'm a woman and have used Bare Escentuals since they debuted. Product is great and quite different from other stuff out there. You can even sleep in it. Recently won Glamour magazine award for best foundation. A lot of my 20- and 30- something friends are switching. Thought you boys could use the 'inside' tip.

This, essentially, is the same thesis my Rule Breakers teammate, Sarah Goddard, gave in recommending the stock to subscribers in the August issue. "Bare Escentuals stands out not for what it puts into its products but for what it leaves out," Sarah wrote at the time. "Some studies have linked parabens (used as preservatives) and other chemicals to cancer, but even if that's debatable, why risk your skin with something you're not sure of?"

Mr. Market's Wild Ride has torpedoed shares of Bare Escentuals by more than 75% since -- more than enough to get cheapskate investor Seth Jayson interested on behalf of Hidden Gems subscribers.

Me, too. Bare Escentuals sells for just 3.6 times trailing earnings, versus 11 times earnings for peer Estee Lauder (NYSE: EL  ) . The industry-average is 10.2, according to Yahoo! Finance. Either Bare Escentuals is done for, or it's far too cheap to ignore.

I suspect it's the latter, but I'm more interested to know what you think. Would you buy Bare Escentuals 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 also contributes to the market-beating Rule Breakers service, which counts Bare Escentuals and GigaMedia as recommendations. Bare Escentuals is also a Motley Fool Hidden Gems pick. GigaMedia is a Global Gains recommendation. Netgear is a Stock Advisor recommendation. Tim didn't own shares in any of the stocks mentioned in this article at the time of publication. The Motley Fool's disclosure policy was small and cuddly. Once.


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