Do Blue-Chip Penny Stocks Exist?

Penny-stock lovers are having a big laugh at the expense of blue-chip investors.

A list of blue-chip stocks selling at penny-stock prices reads like a Who's Who of government bailouts: Citigroup (NYSE: C  ) ; the bankrupt-or-zombie-but-still-trading-above-zero General Motors; AIG; Fannie Mae; and Freddie Mac.

It feels like a betrayal. Blue-chip stocks are supposed to be big and safe ... downright boring, even. Investors in blue chips expect steady growth and solid, inflation-beating returns. They don't expect shares to become virtually worthless.

Those are the risks penny-stock buyers (hopefully) knowingly take. Penny stocks are the ones that promise binary outcomes: wild upsides or bust. Now we have a parade of blue chips that are no longer investments but speculations on dubious business models.

Is Citigroup's loan portfolio really that bad? What will Fannie Mae look like in five years? Is it possible to extricate AIG's core insurance business from its credit default swap nightmare? Who the heck knows?

Investments are calculated risks based on the study of a business. When you can't even pretend to quantify those risks, you have speculation -- precisely what you have in these fallen blue chips and in many penny stocks.

Fortunately, we can combine the better qualities of classic blue chips and penny stocks to find some seriously intriguing investments -- we'll call them blue-chip penny stocks. Let's build one from the ground up:

Size matters
To capture the potential upside of penny stocks, we should focus on small caps -- stocks with market capitalizations of roughly between $200 million and $2 billion. As we've seen, large caps may not be too big to fail, but they're too big to grow by leaps and bounds.

I set a floor of $200 million because microcap stocks aren't usually established enough to satisfy the "blue-chip" part of blue-chip penny stocks.

Beware the bogus
We can limit a major downside of penny stocks by buying only small caps that are listed on major exchanges (in the U.S., that means the NYSE, the Nasdaq, and the Amex). The major U.S. exchanges have listing requirements that screen out many of the fly-by-night operations -- the kinds that send out spam emails pumping their stocks.

There are some legitimate companies that trade over the counter (Nintendo comes to mind), but fishing the OTC waters is not the best way to find the future 10-baggers I've written about in the past. It's much more likely that these become troubled stocks to sell.  

Strength and performance
The beauty of traditional blue chips is that they're not just selling you a dream. In the best cases, they generate strong cash flows that are backed up by rock-solid balance sheets -- think ExxonMobil (NYSE: XOM  ) , IBM (NYSE: IBM  ) , Altria (NYSE: MO  ) , and Coca-Cola (NYSE: KO  ) . We should expect no less from our small-cap stocks. Every company can promise a rosy future (see the failed projections Sirius XM Radio (Nasdaq: SIRI  ) has been rolling out for years), but it's much easier to believe when the present is rosy, too.

They do exist!
So there you have it. It's possible to find stocks with high upside that, while volatile, aren't quite as boom-or-bust as penny stocks are -- but only if we carefully choose to focus the small-cap portion of our portfolio on:

  • Market caps in the $200 million-to-$2 billion range.
  • Listings on major stock exchanges.
  • Positive cash flows and reasonable debt positions.

Using these criteria increases the chances that our small-cap investments will grow to become the next great blue chips.

The analysts over at our Motley Fool Hidden Gems newsletter service are putting the Fool's money where its mouth is. They are constructing a real-money portfolio by buying these blue-chip penny stocks -- although our team simply calls them "promising small-cap stocks."

Three companies that fit the above criteria and sit on their watch list are:

  • Under Armour
  • Horsehead Holding
  • Natus Medical

But none of these has become a purchase yet. Among the companies that have been deemed worthy of a real-money buy is a company the Hidden Gems analysts believe looks similar to McDonald's (NYSE: MCD  ) in its infancy. To view this company and the rest of the team's purchases, simply click here for a free 30-day free guest pass. There's no obligation to subscribe.

Anand Chokkavelu is like Miley Cyrus -- he likes the best of both worlds. He owns shares of McDonald's, Citigroup, Sirius XM, and Altria. Under Armour is a Motley Fool Rule Breakers selection. Nintendo is both a Motley Fool Stock Advisor and Motley Fool Global Gains pick. Coca-Cola is a Motley Fool Inside Value and Motley Fool Income Investor selection. Natus Medical, Under Armour, and Horsehead Holding are Motley Fool Hidden Gems selections. The Fool owns shares of Under Armour, a Rule Breakers recommendation. The Fool has a disclosure policy.


Read/Post Comments (29) | Recommend This Article (55)

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 June 04, 2009, at 4:34 PM, JRSmithman wrote:

    all that needs to happen is not to post here anymore less people that post here, fools will stop writing about the same subject over and over again / which is bashing stocks (Siri comes to mind because they are just trying to get a reaction out of you all. If they dont have it then they cant bash and it wont mean nothing

  • Report this Comment On June 04, 2009, at 4:51 PM, FleaBagger wrote:

    I don't read your articles, but I comment on them anyway. You are all such losers and I never waste my time with you. My comments are the light of your existence, and that is the only reason I put them up here. SIRI will go to $100 per share without a reverse split.

  • Report this Comment On June 04, 2009, at 5:01 PM, mikecart1 wrote:

    ^^FleaBagger, are you serious about your last sentence?

  • Report this Comment On June 04, 2009, at 5:10 PM, dimebag666 wrote:

    flebagger you are my knight in shinning armor.

  • Report this Comment On June 04, 2009, at 5:11 PM, mayhem4masses wrote:

    Nobody buys SIRI radios anymore, I used to own one (I still do, just no service), I dropped that rip off of a company like a hot potato. Save your money and get an HD radio. The death of SIRI will come.

  • Report this Comment On June 04, 2009, at 5:47 PM, dynamicdriver wrote:

    Fleabagger obviously left out a decimal point...he dreams of $1.00...and I agree with mayhem...first thing to go in this day and age a is satellite radio... and the car dealers who sold them are going fast...bye-bye Howard

  • Report this Comment On June 04, 2009, at 6:03 PM, siriradio wrote:

    I feel sorry for such unhappy investors that feel bashing this stocks some how improves their life, or is it they just want to inflict as much grief on other investors who lose money and some how this brings them a form of amusement.

    Either way , Ill take my chances with SIRI long

    Prediction : SIRI .48 + in 28 days

  • Report this Comment On June 04, 2009, at 9:49 PM, unionbuster wrote:

    we all have dreams of a swift market recovery, I say SIRI super long reverse split 10 for 1 will be a solid company in 4 years

  • Report this Comment On June 04, 2009, at 9:49 PM, unionbuster wrote:

    1 for 10 that is

  • Report this Comment On June 04, 2009, at 9:51 PM, unionbuster wrote:

    SIRI 1.68 in 96 days

  • Report this Comment On June 04, 2009, at 9:52 PM, unionbuster wrote:

    SIRI 1.68 in 96 days

  • Report this Comment On June 04, 2009, at 11:58 PM, TMFBomb wrote:

    Any small-cap thoughts not related to Sirius XM? I'd be curious to hear which companies with market caps between $200 million and $2 billion your think are most likely to reach $10 billion in the next 10 years.

    -Anand

  • Report this Comment On June 05, 2009, at 12:09 AM, catoismymotor wrote:

    Anand

    I believe SLW has a shot if silver is being heavily used for batteries and solar panels.

    Cato

  • Report this Comment On June 05, 2009, at 2:28 AM, dividendgrowth wrote:

    Nintendo is on OTC because it doesn't trade in the US.

    Plenty of world's best companies do not trade in the US, such as BASF, Bayer, BMW, Nestle, Roche Holdings, and Tesco; but are available to US investors through the OTC.

    So please have some respect for the OTC market.

  • Report this Comment On June 05, 2009, at 10:41 AM, VerySharp wrote:

    How can you all forget JAV (Great Pharma Stock) @ 1.27 Accepted products and great company.

  • Report this Comment On June 05, 2009, at 10:42 AM, VerySharp wrote:

    JAV @ 1.27

    Penny Stock - Gem

  • Report this Comment On June 05, 2009, at 11:47 AM, VerySharp wrote:

    and VITA (Orthovita) @ 4.40

  • Report this Comment On June 05, 2009, at 1:11 PM, VerySharp wrote:

    Here are a few more:

    CRGN @ 1.39

    CRIS @ 1.45

    BBI @ 1.04

    WEL @ 1.35

  • Report this Comment On June 05, 2009, at 1:20 PM, VerySharp wrote:

    ATSI @ 3.05

    ARAY @ 6.57

    GE @ 11.75

    The above, I believe are good short term and at the same time long terms plays.

    BAC remains a good long term play at current level (11.87).

    It appears another upward wave is forming in the market today - new levels will be tested.

    Look forward to your comments.

  • Report this Comment On June 05, 2009, at 3:07 PM, cloudofjoy wrote:

    I agree with Siri going to $1.00 in the next six months. I think by the next quarterly report will be the end of siri at less than .50. Soon after that it will hit a dollar.

  • Report this Comment On June 05, 2009, at 3:55 PM, JRSmithman wrote:

    how can this stock go anywhere if this keeps trading within a penny lol I see this jump to .3460 to drop back down to .3410

  • Report this Comment On June 06, 2009, at 12:34 AM, cdpilot7 wrote:

    What would the world be like without Howard?

  • Report this Comment On June 16, 2009, at 10:59 AM, plange01 wrote:

    during a low point in the current depression some big name stocks dropped very low..avis to 34 cents dollar thrifty to 60 cents...i was able to buy huge amounts of these for next to nothing...siris to 05 cents if you got lucky to get that better get out soon!.citi dropped below a $1 but still is not worth buying.there were a lot of others and as the depression gets worse again most likely this fall there will be many more penny stocks than last fall...

  • Report this Comment On June 27, 2009, at 9:24 PM, streetflame wrote:

    "Any small-cap thoughts not related to Sirius XM? I'd be curious to hear which companies with market caps between $200 million and $2 billion your think are most likely to reach $10 billion in the next 10 years."

    That works out to 17.5% CAGR, which few companies achieve over a ten year period. It's a nice high goal.

    Some of the likeliest companies to achieve this kind of growth up to ~$10B are in the medical field, for example BLUD Immucor and NPD China Nepstar. Others are in technology such as RRST RRSat Communications and CRNT Ceragon. I think those sectors along with energy have the greatest chance of developing blue chips going forward.

  • Report this Comment On June 30, 2009, at 5:56 PM, MD2003XLT wrote:

    I've had some great luck with AXTI over the past couple of years and in just the past couple of months have doubled my [new] original investment. Since they supply blank wafers to semiconductor manufactures, as tech goes, so does AXTI.

  • Report this Comment On June 30, 2009, at 6:12 PM, MD2003XLT wrote:

    PS - GE was a steal below $10.00. as long as the market keeps treating it like a bank the price is going to stay sweet. Look at the rest of the business - while it may take a couple of years to get back to the highs it saw last year, I believe it will recover nicely with its diverse global markets. All without GE Capital dragging them down. ..Just my opinion

  • Report this Comment On July 05, 2009, at 8:26 PM, hotpennystocks wrote:

    Penny stocks can be dangerous thing for rookie investors. Just looking at http://stockreads.com and you can see the loads of penny stock promotion emails that go out each day. Although I must admit, I personally enjoy trading some of the new big name penny stocks like GMGMQ. It is a lot of fun, but "investor beware" is what all new investors should have in the back of their minds.

  • Report this Comment On July 30, 2009, at 3:52 PM, VerySharp wrote:

    JAV doubles

    ARAY doing nicely (waiting for a double)

    ATSI doing nicely

    VITA doing very well

    Another few:

    BIEL @ .06 (a lot of upside, even .50)

    IDOI @ .005 (look at it yourself)

    ACTC @ .16 (decent penny stock)

    Enjoy.

  • Report this Comment On May 05, 2010, at 3:02 AM, Activetrader123 wrote:

    Thanks for providing such information! I would like to add one more thing about blue chip stocks that is, Blue chip stocks pay regular dividends to its investors. Dividends are profits shared among investors. Blue chip stocks are not working as well as other stocks such as penny stock. Most people that want to learn to trade often begin on penny stock, even though they are more dangerous than the blue chips.

    http://www.activetrader-links.com/

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