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)

Five-Year Return

DXP Enterprises (Nasdaq: DXPE  )

$15.00

****

874.0%

Sociedad Quimica y Minera (NYSE: SQM  )

$25.97

*****

607.6%

VAALCO Energy (NYSE: EGY  )

$6.26

****

444.3%

Titan International (NYSE: TWI  )

$7.90

***

283.5%

LAN Airlines (NYSE: LFL  )

$8.51

**

227.3%

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 has beaten the market for a decade by betting on stocks trading near or below $10 a share, such as Knight Capital Group (Nasdaq: NITE  ) .

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

This week when I ran it, 58 stocks made the cut -- including our last topper, Global Industries. Let's move on to Motley Fool Stock Advisor selection ARM Holdings (Nasdaq: ARMH  ) , a U.K.-based chip designer that has a small but bullish following in our CAPS community:

Metric

ARM Holdings

CAPS stars (5 max)

****

Total ratings

351

Bullish ratings

329

Percent bulls

93.7%

Bearish ratings

22

Percent bears

6.3%

Bullish pitches

48

Bearish pitches

6

Data current as of Dec. 18, 2008.

Third-quarter earnings were outstanding. Royalty revenue surged more than 30% and, while other firms were offering caution, ARM's executives spoke of a "robust" pipeline of fourth-quarter licensing deals.

CAPS investor and design engineer taitt believes the good times will continue. "I see ARM cores everywhere. More and more product offerings from all major players, more and more design wins," wrote our Fool in October. "ARM cores are great for embedded computing, a big market segment. Nobody is situated to bump them out in the next few years. Their lack of capital expenditure needs to make sales will help them weather this crisis."

Agreed, but I'm more interested to know what you think. Would you buy ARM Holdings 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! 

On Jan. 12, 2009, Fool co-founder David Gardner, Jeff Fischer, and their Motley Fool Pro team will accept new subscribers to their real-money portfolio service. Motley Fool Pro is investing $1 million of the Fool’s own money in long and short positions in a range of securities, including common stocks, put and call options, and exchange-traded funds (ETFs). They also incorporate proprietary CAPS "community intelligence" data into their research. To learn more about Motley Fool Pro and to receive a private invitation to join, simply enter your email address in the box below.

Fool contributor Tim Beyers contributes to the market-beating Rule Breakers service. ARM Holdings is a Stock Advisor selection. LAN Airlines is an Income Investor pick.

Tim didn't own shares in any of the stocks mentioned in this article at the time of publication. Check out his portfolio holdings and Foolish writings. The Fool's disclosure policy was small and cuddly. Once.


Read/Post Comments (2) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 18, 2008, at 10:28 PM, Clint35 wrote:

    Wow! You bet I'd buy ARMH at current prices! I had lost track of them. I took them off my watch list about a year and a half ago and forgot all about them. In fact I'd buy shares right now if I hadn't spent all my spare cash on shares if IMAX yesterday.

  • Report this Comment On January 13, 2009, at 10:11 AM, DaveRensberger wrote:

    I work as an embedded software engineer, and I don't see ARM's dominance of that market ending any time soon. It's depressing, however, watching the stock seem to perpetually trend downwards. It makes no sense to me... Does the street just have no respect for this company? Do they really think that Intel will steal all of ARM's market share away with their new Atom processor? Most embedded engineers I know would much prefer to work with ARM designs than Intel designs, and ARM still fares much better in terms of price/performance/energy consumption. I really don't understand why the shares stay so low, but over the past 3-4 years I've continued to buy more of them because the valuation just seems so compelling. The market is almost always rational in the end, but with certain stocks it can be irrational for years sometimes. I think this is one of those cases.

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