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

Meridian Bioscience (Nasdaq: VIVO  )

$18.79

****

347.4%

Aurizon Mines (AMEX: AZK  )

$3.84

***

231.9%

Eldorado Gold (AMEX: EGO  )

$7.66

***

165.9%

Tata Communications (NYSE: TCL  )

$18.37

***

138.9%

CyberSource (Nasdaq: CYBS  )

$13.86

**

221.6%

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 Kennametal (NYSE: KMT  ) .

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

This week when I ran it, 85 stocks made the cut -- including our last topper, Manitowoc. Let's move on to steel producer Gerdau AmeriSteel (NYSE: GNA  ) , which has a small but bullish following in our CAPS community:

Metric

Gerdau AmeriSteel

CAPS stars (5 max)

*****

Total ratings

498

Percent bulls

98.5%

Percent bears

1.5%

Bullish pitches

64 out of 64

Data current as of March 14, 2009.

Interestingly, these investors have reason to be skeptical. Gerdau AmeriSteel has shown itself to be extremely susceptible to economic headwinds. For example, in August, the company reported 92% revenue growth and 88% profit growth. Months later, in February, management said that fourth-quarter revenue had fallen 17%.

Goodbye, growth story.

Yet CAPS investor steelbier isn't concerned. "This is a strong company. They were honest about inventory value and took a big hit in the 4th qtr 08," this Fool wrote in a pitch in February:

They are getting beat up for it, but the other guys like [Commercial Metals], [Nucor] & [U.S. Steel] will have to fess up soon!! Buy at these lower numbers and I think you'll see a good return in a year or two. Things will get worse before they get better.

And if they do get worse? So be it. Gerdau AmeriSteel trades for less than four times estimated earnings and pays a 2.4% dividend that, if history serves, will be fully funded through free cash flow.

But that's my take. I'm far more interested to know what you think. Would you buy Gerdau AmeriSteel 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. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's 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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