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 (Out of 5)

5-Year Return

GigaMedia (Nasdaq: GIGM  )

$5.70

*****

387.2%

Almost Family (Nasdaq: AFAM  )

$25.87

****

524.9%

Sterling Construction (Nasdaq: STRL  )

$13.12

***

234.7%

Tata Communications (NYSE: TCL  )

$18.76

***

199.2%

SBA Communications (Nasdaq: SBAC  )

$23.79

*

439.5%

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 Knight Capital Group (Nasdaq: NITE  ) .

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?

This week when I ran that screen, 49 stocks made the cut -- including our last topper, SiRF Technology.

My favorite penny stock this week is Alvarion (Nasdaq: ALVR  ) , one of my picks for Motley Fool Rule Breakers, and a stock I own. The details:

Metric

Alvarion

CAPS Stars

*****

Total Ratings

859

Percent Bulls

97.1%

Percent Bears

2.9%

Bullish Pitches

144 out of 146

Data current as of June 25, 2009.

Let's face it: For months, Alvarion has been doing nothing. But in the past week, two major deals landed in its lap. Late last week, the company announced a $100 million, five-year agreement with Open Range Communications here in the U.S. Then, on Tuesday, Alvarion revealed a deal with Italy's Aria to supply equipment for a national WiMAX network in that country.

Could we see more deals like this? Over the short term, sure. Julius Genachowski, President Obama's incoming head of the Federal Communications Commission (and a former Motley Fool board member), told Congress that he plans to make good on the president's pledge to increase broadband access in rural areas. That should mean a heavy dose of wireless technology.

But even if there are no more deals to be had, look at the math. Alvarion is presently worth just more than $270 million in market cap, yet it booked $282 million in revenue over the trailing 12 months.

Think about what that means: Each dollar of Alvarion revenue trades for less than $1. And it's just landed two good-sized contracts, so that revenue should be growing. We also know that Alvarion has more than $135 million in cash and no debt on its books. Growth, meet value.

But that's my take. I'm more interested in knowing what you think. Would you buy Alvarion at today's prices? Sign up for CAPS today and let us know. 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.

Alvarion and GigaMedia are Rule Breakers recommendations and GigaMedia is a former pick of Global Gains.

Fool contributor Tim Beyers owned shares of Alvarion and GigaMedia 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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