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

Insteel Industries (Nasdaq: IIIN  )

$7.87

****

1,474.0%

DXP Enterprises (Nasdaq: DXPE  )

$13.57

****

637.5%

NutriSystem (Nasdaq: NTRI  )

$13.78

****

535.0%

Yamana Gold (NYSE: AUY  )

$8.99

****

235.4%

LAN Airlines (NYSE: LFL  )

$8.75

**

217.0%

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 ValueClick (Nasdaq: VCLK  ) .

Even some of 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 CAPS-rated 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 -- run it for yourself by clicking here -- 71 stocks made the cut -- including our last topper, Brocade Communications. Let's move on to Flextronics International (Nasdaq: FLEX  ) , which has a growing following in our CAPS community:

Metric

Flextronics International

CAPS stars (5 max)

****

Total ratings

457

Percent bulls

95.2%

Percent bears

4.8%

Bullish pitches

72 of 75

Data current as of Feb. 17, 2009.

The consensus is that this stock has gone cheap. Really cheap. "Flextronics is a overseas manufacturer of components for the US and worldwide tech world. They have a huge market cap, and have been hurt by writedowns recently. Their sales growth is impressive, even with their lack of current profits," wrote CAPS investor DEYTONA in November. Continuing, “Once the writedowns are done, expect the sales and profits to start to climb and then the stock value will double, and still be a bargain in comparison to its recent 52 week range.”

The stock has fallen another 30% since that pitch and, today, is priced as if each dollar of revenue is worth just -- wait for it --$0.07. Ugh.

If the bears are biting it's because Flextronics isn't flexing. Not anymore, anyway. Last month, the company reported a wider-than-expected third-quarter loss and warned of  weak fourth-quarter results.

Still, you don't sell a stock for $0.07 on the dollar unless it's about to die. I don't believe that Flextronics will. Contract manufacturing -- its core business -- is far too important an industry to lose one of its biggest providers.

But that's my take. I'm far more interested to know what you think. Would you buy Flextronics 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 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 find out what our penny stock sleuths are following now.

Fool contributor Tim Beyers also contributes to the market-beating Rule Breakers service. LAN Airlines is an Income Investor recommendation.

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.


Read/Post Comments (2) | Recommend This Article (21)

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 February 17, 2009, at 10:09 PM, XMFBogey wrote:

    "Still, you don't sell a stock for $0.07 on the dollar unless it's about to die. I don't believe that Flextronics will. Contract manufacturing -- its core business -- is far too important an industry to lose one of its biggest providers."

    I love the screen but think this conclusion on Flextronics is something to be carefully considered.

    The flip side of this statement, of course, is that stocks like FLEX don't trade for $0.07 on the dollar unless they ARE about to die. And, as for the industry being important or not, there's really no correlation between the importance of the industry and FLEX's ability to do well in it. Too big to fail is no longer an allowable argument, IMO :)

  • Report this Comment On March 02, 2009, at 2:17 PM, FLXHTR wrote:

    Being a two time recipient of a "campus closure" with FLEX I have seen first hand the "hows" and the "whys" of this powerhouse's faltering ways. But I too will soon be jumping on the "BUY" train with this baby. On paper they're a bargain you just can't pass on...

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