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)

Five-Year Return

ViroPharma (Nasdaq: VPHM  )

$5.53

*****

214.2%

Nuance Communications (Nasdaq: NUAN  )

$11.84

****

150.3%

Art Technology Group (Nasdaq: ARTG  )

$3.77

***

252.3%

True Religion (Nasdaq: TRLG  )

$19.64

**

2,627.8%

LAN Airlines (NYSE: LFL  )

$11.49

**

280.5%

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 Timberland (NYSE: TBL  ) .

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, 50 stocks made the cut -- including our last topper, Silvercorp Metals.

My favorite penny stock this week is China Nepstar Chain Drugstore (NYSE: NPD  ) , a micro-cap that last appeared in this column in September, and which has vastly outperformed the market since. Today's details:

Metric

China Nepstar Chain Drugstore

CAPS stars (5 max)

*****

Total ratings

193

Percent Bulls

95.9%

Percent Bears

4.1%

Bullish pitches

20 out of 20

Data current as of July 13, 2009.

CAPS investors are more bullish now than they were last fall. A seven percent dividend yield certainly can't hurt, but neither can the company's market position -- recently enhanced via a buyout of a five-store chain in Beijing, China Nepstar's first such presence in the Sino Superstar's bustling capital city.

Others like the druggist's capital position. "China Nepstar Chain Drug is the largest drugstore chain in China. It sells for [$5] per share, but it holds $1.32 per share in net cash," wrote CAPS All-Star mrindependent last week. "At 2.6 times book value, this stock is a little pricier than my normal pick, but I believe it is one of the greatest growth opportunities in the world."

Agreed, but that's also just one Fool's take. I'm more interested to know what you think. Would you buy China Nepstar Chain Drugstore 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. Nuance Communications is a current Hidden Gems pick. Try any of our Foolish newsletter 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. 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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Related Tickers

1/5/2011 4:00 PM
ARTG.DL22 $6.00 Down +0.00 +0.00%
Art Technology Gro… CAPS Rating: ***
LFL $12.40 Up +0.15 +1.22%
Lan Airlines S.A.… CAPS Rating: **
NPD $2.30 Down -0.05 -2.13%
China Nepstar Chai… CAPS Rating: **
NUAN $17.01 Up +0.14 +0.83%
Nuance Communicati… CAPS Rating: ****
TBL.DL $0.00 Down +0.00 +0.00%
The Timberland Co. CAPS Rating: ***
TRLG $0.00 Down +0.00 +0.00%
True Religion Appa… CAPS Rating: **
VPHM $0.00 Down +0.00 +0.00%
ViroPharma, Inc. CAPS Rating: ***

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