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)

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!

Each month, our 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 see what our penny stock sleuths are following now.

Titanium Metals and VASCO Data Security are Stock Advisor selections. Tata Motors is a Global Gains pick.

Fool contributor Tim Beyers also contributes to the market-beating  Rule Breakers service. 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, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy was small and cuddly. Once.


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