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 Rating
(out of five)

5-Year Return

American Oriental Bioengineering (NYSE: AOB  )

$4.96

*****

110%

LMI Aerospace (Nasdaq: LMIA  )

$10.48

****

759%

GeoResources (Nasdaq: GEOI  )

$10.67

****

465%

American Dairy (NYSE: ADY  )

$42.30

***

1,310%

Green Mountain Coffee Roasters (Nasdaq: GMCR  )

$60.43

*

1,296%

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 TradeStation (Nasdaq: TRAD  ) .

Even the All-Stars in our 135,000-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?

When I ran that screen this week, 51 stocks made the cut -- not including our last topper, Orthovita.

My favorite penny stock this week is Northgate Minerals (AMEX: NXG  ) , a copper and gold miner that our CAPS community mostly loves:

Metric

Northgate Minerals

CAPS rating (out of five)

****

Total ratings

1,442

Percent Bulls

96.8%

Percent Bears

3.2%

Bullish pitches

213 out of 215

Data current as of June 15, 2009.

Bullish investors find Northgate's valuation most enticing. As CAPS All-Star goldminingXpert wrote in a pitch last month:

Reloading at 20% cheaper than my last pick as it outperformed the S&P but still declined. This stock is worth $4 to $7 if you value it on the same metrics as other mid-tier gold producers are valued with. I own this stock -- have owned it since I first purchased at $3 and tripled down at $0.98.

Analysts would appear to agree. Northgate trades for 14 times forward earnings, a fraction of the 46% average annual income growth the Street expects this company to achieve over the next five years. Color me intrigued.

But that's just my opinion -- I'm more interested to know what you think. Would you buy Northgate Minerals 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.

Green Mountain Coffee Roasters is a Motley Fool Rule Breakers recommendation. American Oriental Bioengineering has won favor with both our Hidden Gems and Motley Fool Global Gains services. Try any of our Foolish newsletter services free for 30 days. The Fool owns shares of American Oriental Bioengineering.

Fool contributor Tim Beyers 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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