The Next Million-Dollar Penny Stock

Penny stocks can make you rich. Need proof? Every one of these multi-baggers was, at one time, a penny stock:

Company

Recent Price

CAPS Stars (out of 5)

5-Year Return

McDermott International (NYSE: MDR  )

$10.77

*****

247.1%

Vaalco Energy (NYSE: EGY  )

$5.29

****

190.0%

Terra Industries (NYSE: TRA  )

$25.00

****

428.7%

Spartan Stores (Nasdaq: SPTN  )

$14.45

****

202.7%

thinkorswim Group (Nasdaq: SWIM  )

$7.55

***

228.3%

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 enjoyed the stock market’s super-cheap seats in the past, and sometimes he still does. 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 NetGear (Nasdaq: NTGR  ) .

Even the All-Stars in our 130,000-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 doesn't exceed $2 billion, but is at least $250 million? Surely our new CAPS screener would return some winners, right?

This week when I ran it, 76 stocks made the cut -- not including our last topper, Rackspace Hosting. Let's move on to Manitowoc (NYSE: MTW  ) , which has a strong, if skeptical, following in our CAPS community:

Metric

Manitowoc

CAPS stars (out of 5)

****

Total ratings

1,676

Percent bulls

97.6%

Percent bears

2.4%

Bullish pitches

262 out of 267

Data current as of March 5, 2009.

Bulls worry about Manitowoc's $2.6 billion debt load, taken on to finance its recent acquisition of Enodis. The deal has yet to pay off. Manitowoc's fourth-quarter backlog for cranes and crane equipment dipped 34%, leading management to cut jobs in the segment.

So why buy? Valuation. "November was a little early to get in on this ... quite cheaper now and still part of any infrastructure play. The world population is still growing and construction will boom once again despite current economic situation. IF Manitowac survives the next two years it will multiply in value nicely over the long term," wrote CAPS investor teamrider on Monday.

The bar is pretty low. Manitowoc trades for less than twice trailing earnings, and investors value each dollar of revenue as if it's worth just $0.07. Thus, I agree with teamrider; any result other than bankruptcy should enrich investors who buy now.

But I'm also just one Fool. I'm far more interested to know what you think. Would you buy Manitowoc 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 find out what our penny-stock sleuths are following now.

Tim didn't own shares in any of the companies 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. NetGear is a Stock Advisor selection. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy was small and cuddly. Once.


Read/Post Comments (2) | Recommend This Article (16)

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 March 11, 2009, at 6:38 AM, marktsgooch wrote:

    "Thus, I agree with teamrider; any result other than bankruptcy should enrich investors who buy now."

    I think it is obvious that IF it can avoid bankruptcy, this stock has massive upside (and may even pay a dividend to wait).

    The key question is that 'IF' - can Manitowoc avoid bankruptcy?

    To me, bankruptcy looks very likely. (E.g. Manitowoc has a Z-score of 1.12). Which explains why the market has hammered the stock down. And right now, there are much 'safer' stocks out there that are more likely to survive, are more likely to continue paying a dividend, and have a massive upside too.

    But I seem to be in a minority. So I am curious - why is the community rating this stock as 5-star? What do 97.56% of CAPS members know that I don't?

  • Report this Comment On March 12, 2009, at 10:25 PM, ackland18 wrote:

    With the economic times with they way they are penny stocks really are the way to go. A lot of blue chippers are becoming penny stocks anyways. As an investor for over 10 years now I have become accustom. to the highs and lows of penny stocks. I think that's what makes it such an exciting part of the market. When I had first got into investing I started off with blue chips and it was just so hard to turn a profit with little initial investment. I had switched over to the pennies and I can actually fight inflation and taxes at the end of each year. haha. Sure you have a higher risk, but the ability to win big I think is why so many do it. One site that has really taken it to the next level is Iron Hot Stocks. They write a newsletter each week for whats going on in the penny stocks market. The picks they have each week to fairly well which is the main reason I use them. To make it in penny stocks I would really recommend you familiarize yourself with support and resistance lines. Once you get that down you can turn penny stock investing into a full time carrier. That is as long as you remember to take smaller gains and not get greedy.

    Here is a link for that one site

    Check em out:

    http://www.ironhotstocks.com

    Happy Trading!

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