The Next Million-Dollar Penny Stock

Penny stocks can make you rich. Need proof? Every one of these multibaggers was once a penny stock:

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 American Eagle Outfitters (NYSE:AEO).

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, 47 stocks made the cut -- including our last topper, Dennison Mines.

My favorite penny stock this time around is Hercules Offshore (NASDAQ:HERO), an oil driller and one-time Motley Fool Hidden Gems pick. The details:

Data current as of Aug. 14, 2009.

"Despite movements toward alternate energy and fuel, oil is too [dominant] to simply be shoved over, and while [price per barrel] will never be at $140 again, having it go to $80 will easily affect additional 50-100% returns by both companies. Wish I had more cash at the moment to buy up more," wrote CAPS All-Star tgarci2 yesterday.

I agree, but I also find it fascinating that All-Stars are still piling into the stock since its double-digit pop in late July. Of the 22 investors to rate Hercules Offshore since that day, 18 say it will outperform. You won't find any of our top-ranked investors among the bears.

That gutsy call isn't supported by short-term data. Oil inventories are rising around the globe, which should lead to lower prices, and less revenue for Hercules. On the other hand, the International Energy Agency's chief economist predicts that we'll reach peak oil -- the point of maximum production -- by 2020, at which point Hercules could realize a windfall.

Do you agree? Would you buy Hercules Offshore at today's prices? Let us know by signing up for CAPS today. It's 100% free to participate.

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