The Next Million-Dollar Penny Stock

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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
Titanium Metals (NYSE: TIE)	$6.97	*****	516.8%
VASCO Data Security (Nasdaq: VDSI)	$7.05	*****	143.1%
Sterling Construction (Nasdaq: STRL)	$17.88	*****	354.9%
Smith Micro Software (Nasdaq: SMSI)	$5.44	*****	102.2%
Fuel Tech (Nasdaq: FTEK)	$9.35	****	139.7%

Sources: Motley Fool CAPS, Yahoo! Finance.

The promise of outrageous returns has occasionally made even the world's best stock pickers penny stock investors. Peter Lynch continues to 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, including Pan American Silver (Nasdaq: PAAS).

Even the All-Stars in our 125,000-plus Motley Fool CAPS community take to penny stocks.

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

This week when I ran the screen, 77 stocks made the cut -- including our last topper, JA Solar. Let's move on to Tata Motors (NYSE: TTM), a Motley Fool Global Gains pick that has a substantial following in our CAPS community:

Metric	Tata Motors
CAPS stars (5 max)	*****
Total ratings	2,410
Bullish ratings	2,336
Percent Bulls	96.9%
Bearish ratings	74
Percent Bears	3.1%
Bullish pitches	433
Bearish pitches	9

Data current as of Jan. 22, 2009.

The Indian automaker is in an interesting spot. On the one hand, Tata's $2,500 Nano has suffered manufacturing setbacks. On the other, Tata recently acquired Land Rover and Jaguar from Ford. Those divisions could add profits if Tata's lower-cost labor force maintains the sort of quality that luxury buyers expect.

"India growth and reasonable debt offset risk of Nano, and if it takes off, even better. Nice yield looks sustainable," wrote CAPS investor dollarpuppy earlier this month.

Our Fool is referring to Tata's capital position, which does, indeed, look reasonable. After its acquisition, debt stands at 55% of total capital, but a large portion of those obligations won't come due before 2011.

But that's my take. I'm more interested to know what you think. Would you buy Tata Motors 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!