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

Ebix (Nasdaq: EBIX  )

$30.11

*****

595%

Arena Resources (NYSE: ARD  )

$34.09

****

763%

Terra Industries (NYSE: TRA  )

$29.90

****

532%

Hansen Natural

$40.37

***

1,215%

STEC (Nasdaq: STEC  )

$17.00

***

352%

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 still does on occasion. 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 Pacific Sunwear (Nasdaq: PSUN  ) .

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? Well, the warning the SEC issued about them provides one excellent reason to steer clear. 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 seek only four- and five-star stocks with a market cap between $250 million and $2 billion? Surely our CAPS screener would return some winners, right?

This week when I ran that screen, 53 stocks made the cut -- not including our last topper, Advance America, Cash Advance Centers.

My favorite penny stock this week deals in unsticking black gold from the fields and the seas, Parker Drilling (NYSE: PKD  ) . Our CAPS community mostly likes what it sees:

Metric

Parker Drilling

CAPS stars (5 max)

****

Total ratings

667

Percent Bulls

97.3%

Percent Bears

2.7%

Bullish pitches

93 out of 95

Data current as of May 26, 2009.

On the whole, CAPS investors and those who've bet on the likes of Chevron and ExxonMobil (NYSE: XOM  ) expect oil to rally further, and they believe that Parker Drilling will benefit from the rising tide.

I'm starting to build a basket of oil service companies. They've been pretty well battered and I expect we aren't going back to the days of cheap energy. I'm being careful to focus on companies with relatively strong balance sheets that aren't apt to trip debt covenants if things continue slow for awhile. Parker is a small pure play on drilling.

So wrote my Foolish colleague, Stan Huber, known in these digital parts as TMFPlatoish, near the beginning of the month. Continuing:

It also has a drilling equipment rental arm that is a profitable business. The company has been around since the 30's and still has a Parker as CEO. It understands the cyclical nature of its business. Debt load looks manageable and it is trading at less than half of book value. It should outperform the market.

But that's my take. I'm more interested to know what you think. Would you buy Parker Drilling at today's prices? Let us know by signing up for CAPS today. It's 100% free to participate.

More millionaire-making Foolishness:

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.

Fool contributor Tim Beyers didn't own shares in any of the companies mentioned in this article at the time of publication. Ebix and Hansen are Rule Breakers recommendations. 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 (2) | Recommend This Article (11)

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 May 27, 2009, at 4:30 PM, kellogg9 wrote:

    It's all about research...research into the numbers and the people behind those penny stocks. For me Penny Stocks although attractive have not been my cup of tea...too risky.. as you mention the SECs warning about them was clear as day eventhough anyone with an ounce of commonsense could have realized that too.

    Kelly

    http://www.stockcoupons.com/

  • Report this Comment On July 31, 2009, at 8:08 AM, WINNER09 wrote:

    anyone can tal about shares after seeing the past figures. but penny stocks are always risky watch out.

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