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

(5 Max)

Five-Year Return

Dynamic Materials (Nasdaq: BOOM  )

$10.13

*****

553.5%

Meridian Bioscience (Nasdaq: VIVO  )

$16.90

*****

310.2%

True Religion (Nasdaq: TRLG  )

$12.16

**

1,047.2%

Sterling Construction

$19.38

**

396.9%

SIGA Technologies (Nasdaq: SIGA  )

$4.87

**

160.4%

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 beaten the market for a decade by betting on stocks trading near or below $10 a share, including Hecla Mining (NYSE: HL  ) .

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 CAPS screener would return some winners, right?

This week when I ran it, 72 stocks made the cut -- including our last topper, International Coal. Let's move on to Liberty Media Interactive (Nasdaq: LINTA  ) , which has a small but mostly bullish following in our CAPS community:

Metric

Liberty Media Interactive

CAPS stars (5 max)

***

Total ratings

127

Percent Bulls

90.6%

Percent Bears

9.4%

Bullish pitches

10 out of 10

Data current as of April 7, 2009.

My interest in Liberty follows from my interest in Sirius XM Radio (Nasdaq: SIRI  ) . Fools know I'm bearish when it comes to the satellite radio supplier. At its current valuation, I sense that risks related to debt, dilution, weak partners, and emerging competition aren't being compensated.

And yet I could be wrong. Heck, I hope I'm wrong. Betting modestly on Liberty would provide juice for my portfolio were Sirius to succeed, as others believe it will. If not, I'd lose little -- or maybe nothing.

See, at Liberty, Sirius XM is one of many plum properties. "Interesting mix under one umbrella. I don't like the holdings in [Sprint Nextel] and some others, but [DirecTV], Expedia, and more are some nice holdings," wrote CAPS All-Star rofgile in February. "Now they will also have a 40% stake in XM-Sirius, which is huge. Seems like they are running an interesting mega media corporation."

Agreed, but that's my take. I'm more interested to know what you think. Would you buy Liberty Media Interactive 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 find out what our penny stock sleuths are following now.

Dynamic Materials is a current Hidden Gems recommendations. Sprint is a Inside Value recommendation. Try any of these Foolish services free for 30 days.

Fool contributor Tim Beyers didn't own shares in any of the companies mentioned in this article at the time of publication. The Fool owns shares of Dynamic Materials. 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.


Read/Post Comments (6) | Recommend This Article (24)

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 April 08, 2009, at 6:08 PM, dstnewman wrote:

    Tim, let me get this straight: You don't think Sirius is going to pay its huge debt, but you want to buy Liberty because Sirius is going to pay its huge debt?

    You sure made made it seem like you believed Sirius to be worthless in your article ABOUT sirius, now in an article about Liberty, you are saying that basically your only interest in Liberty came because of Sirius? How does that make sense?

    Sure, you preface your comments by saying that you hope you are wrong... yet you never mentioned that caution statement in your fire and brimstone evaluation of Sirius in the Bull/Bear argument.

    What ever.

    Newman

    http://www.SiriusBuzz.com

  • Report this Comment On April 08, 2009, at 10:40 PM, TMFMileHigh wrote:

    Hellooooooooo Newman. (Sorry, I couldn't resist. My Seinfeld streak runs deep.)

    Thanks for your comments.

    Of course I hope I'm wrong. I don't enjoy watching investors lose money. Only a first-class jerk would. My bearish thesis was and still is meant to educate and provoke. I absolutely believe the odds are against Sirius. But if you insist on betting on Sirius -- as many here do -- then I can't think of a better vehicle for doing so than via Liberty.

    That's the point. No more, no less.

    Foolish best,

    Tim (TMFMileHigh and @milehighfool on Twitter)

  • Report this Comment On April 08, 2009, at 11:33 PM, JRSmithman wrote:

    So you dont believe Sirius can make it / I would have to say differently since there is a regulated short selling band and the Debt that Sirius owes I think can be paid off later on down the road / and if GM gets its act together for what is being stated so far will even be more of a Plus / Liberty will not let Sirius fail, which Liberty and Sirius will benifit from each other. So the way I see it there are more positivies than negatives for this stock in the long run. I am sure you already know this Tim, and the article is nothing but opinion like you said

  • Report this Comment On April 09, 2009, at 7:54 AM, TMFMileHigh wrote:

    Hello JRSmithman,

    Thanks for the comment.

    >>So the way I see it there are more positives than negatives for this stock in the long run. I am sure you already know this Tim, and the article is nothing but opinion like you said

    Not quite. I'm writing analysis. So while the conclusion is my opinion, all of it is informed by the details and numbers I've included in earlier stories.

    Certainly there are positives for Sirius XM. They may even outweigh the negatives. Nevertheless, the numbers -- the brutal, mathematical truths that follow interest payments and massive dilution -- don't justify the valuation.

    Thanks again and Foolish best,

    Tim (TMFMileHigh and @milehighfool on Twitter)

  • Report this Comment On April 09, 2009, at 6:30 PM, geoslv wrote:

    Sorry for not being fully informed but I've only come to SIRI in the last month. So these comments are taking an inevitable path onto Sirius. If Liberty converted to its 40% common shares, is there reason to think they would start selling them?

    The 40% is of the resulting total, not the current number, isn't it?

    Liberty will take care of the debt because Liberty WANTS Sirius satellite.

  • Report this Comment On April 28, 2009, at 2:36 PM, DiscoFinance wrote:

    Great point! This issue is exposed in a new movie (stockshockmovie.com). FYI: I used coupon code: FREESHIP for free shipping of the DVD.

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