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

Smith Micro Software (Nasdaq: SMSI  )

$10.76

*****

332.1%

Quidel (Nasdaq: QDEL  )

$14.82

*****

292.1%

ClickSoftware Technologies

$6.74

*****

262.4%

Illumina (Nasdaq: ILMN  )

$32.25

****

1,179.8%

Life Partners Holdings (Nasdaq: LPHI  )

$17.21

**

696.8%

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 Exelixis (Nasdaq: EXEL  ) .

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, 48 stocks made the cut -- not including our last topper, China Nepstar Chain Drugstore.

My favorite penny stock this week is Exide Technologies (Nasdaq: XIDE  ) , a maker of batteries for car, trucks, and other industrial equipment. The details:

Metric

Exide Technologies

CAPS stars (5 max)

*****

Total ratings

298

Percent Bulls

97%

Percent Bears

3%

Bullish pitches

44 out of 44

Data current as of July 17, 2009.

Like earlier penny pick Alvarion (Nasdaq: ALVR  ) , CAPS investors like Exide for its potential to profit from federal stimulus. Ford and other automakers are receiving billions to outfit new vehicles with more energy-efficient engines.

There's just one wrinkle: Exide's primary business is lead-acid batteries. Management has only recently begun to align the business towards greater production of electrics, which differ from their more mature lead-acid cousins.

"The latest news is mostly that their new offerings will excel in the hybrid market, not the EV [electric vehicle] market," wrote CAPS investor Scoobrs earlier this month. "However, I believe that Exide will grow to expand their addressable market with EV offerings. I'm betting on a car battery company to know which way the wind's blowing and follow it."

Agreed, but that's also just one Fool's take. I'm more interested to know what you think. Would you buy Exide Technologies 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 owned shares of Alvarion 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. Alvarion and Exelixis are Rule Breakers recommendations. Illumina is a Stock Advisor selection. The Fool owns shares of Exelixis. Its disclosure policy was small and cuddly. Once.


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