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

Sociedad Quimica y Minera (NYSE: SQM  )

$28.28

*****

683.4%

Illumina (Nasdaq: ILMN  )

$28.45

****

522.5%

Denbury Resources (NYSE: DNR  )

$13.33

*****

266.2%

GeoResources

$7.20

****

233.3%

Eldorado Gold

$7.28

****

148.5%

Sources: Motley Fool CAPS, Yahoo! Finance.

The promise of outrageous returns has periodically made even the world's best stock pickers 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, including Williams-Sonoma (NYSE: WSM  ) .

Even the All-Stars in our 125,000-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 strictly falls between $250 million and $2 billion? Surely our new CAPS screener would return some winners, right?

When I ran the screen this week, 64 stocks made the cut. (You can try it yourself, but remember that it will change as the market changes.) This included our last topper, Tata Motors. Let's move on to Brocade Communications (Nasdaq: BRCD  ) , which has a growing following in our CAPS community:

Metric

Brocade Communications

CAPS stars (5 max)

****

Total ratings

508

Percent Bulls

93.9%

Percent Bears

6.1%

Bullish pitches

78 of 85

Data current as of Jan. 29, 2009.

You may remember Brocade as the company whose former CEO, Gregory Reyes, was sentenced to prison for backdating options grants. That's unfortunate, because there's more to Brocade than that scandal.

I ran across the company shortly after its founding, in 1995, when I was a young PR pro working on behalf of an advocacy group called The Fibre Channel Association. Brocade was a founding member. To this day, it's well known as a maker of gear for internetworking -- connecting one or more networks via high-speed data-delivery schemes like fibre channel and gigabit ethernet.

Mostly, this gear is used to attach clusters of storage devices to networks, in order to preserve data in real time. Vendors and analysts call this technology storage area networking, or SAN. EMC (NYSE: EMC  ) and Network Appliance (Nasdaq: NTAP  ) participate in this market alongside Brocade, albeit in different capacities.

Something must be going right in the SAN world; Brocade raised its fourth-quarter guidance in November. Notable skeptics such as CAPS All-Star TSIF like what they're hearing. Quoting from our Fool's mid-January pitch:

When Brocade popped up no my screen I peeked in to see how this old dog was doing, thinking maybe I had a red-thumb candidate. Surprisingly, however, expecting to see this once $100 darling that has been tossed aside by investors from the "internet age", struggling to survive, never to beat the S&P, I find a company buying larger companies and growing, optimistically. The Foundry merger had scared the hedges/investors due to it's size and the timing, but the complementary merger, just before our countries network infrastructure starts getting noticed as a federal infrastructure candidate, offers great growth potential.

Agreed, but I'm more interested to know what you think. Would you buy Brocade 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 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 discover what our penny stock sleuths are following now.

Illumina is a Stock Advisor selection. 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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11/21/2014 4:00 PM
BRCD $11.50 Down -0.08 -0.69%
Brocade Communicat… CAPS Rating: ****
DNR $10.15 Up +0.38 +3.92%
Denbury Resources CAPS Rating: ****
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ILMN $185.83 Down -0.43 -0.23%
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NTAP $42.31 Up +0.11 +0.26%
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