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

Dynamic Materials (Nasdaq: BOOM  )

$18.19

*****

989.2%

ViroPharma

$7.98

*****

271.2%

Female Health Co.

$6.07

*****

257.1%

Ebix (Nasdaq: EBIX  )

$52.50

****

1,144.1%

U.S. Global Investors

$12.94

****

824.3%

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 Silver Standard Resources (Nasdaq: SSRI  ) .

Even the All-Stars in our 140,000-plus-member 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 market caps between $250 million and $2 billion? Surely our CAPS screener would return some winners?

This week when I ran that screen, 59 stocks made the cut -- including our last topper, Rubicon Minerals.

My favorite penny stock this week is Akamai (Nasdaq: AKAM  ) competitor Limelight Networks (Nasdaq: LLNW  ) . The details:

Metric

Limelight Networks

CAPS stars (out of 5)

****

Total ratings

170

Percent bulls

88.8%

Percent bears

11.2%

Bullish pitches

25 out of 26

Data from CAPS.

As much as our CAPS crowd likes Limelight, this isn't an easy pick to make. Researchers at Raymond James recently downgraded the stock on concerns that the company wouldn't be able to overcome pricing pressure from start-ups and established peers.

That's possible. But having spent years studying Akamai for our Motley Fool Rule Breakers subscribers, I know that large clients such as Apple (Nasdaq: AAPL  ) and Netflix (Nasdaq: NFLX  ) tend to do business with established vendors, and there's no doubting Limelight's credibility in this area; it's the clear No. 2 behind Akamai, as CAPS investor smortypants pointed out in June:

Got my attention when I was researching Akamai. ... They could be a big player (possibly VERY big) in the next wave of high density (read: TV/video) content delivery over the Internet. With mobile internet emerging as possibly the most exciting tech phenomenon since the Internet itself and the soon to be released $99 iPhone and amazing [Palm] Pre as well as the growth of services like Hulu, this could be huge. PE is a bit heavy and if I were buying this stock for real, I would probably wait for a 5-10% pullback, which I think we will get.

The stock is off roughly 15% since, and today Limelight trades for a slight premium to Akamai in terms of enterprise value to projected earnings before interest, taxes, depreciation, and amortization (EBITDA).

There's risk in buying Limelight at these levels, but I suspect not as much as investors think. Do you agree? Would you buy Limelight Networks 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 microcap 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.

Dynamic Materials is a Motley Fool Hidden Gems pick and the Fool owns shares. Akamai and Ebix are Motley Fool Rule Breakers recommendations. Apple and Netflix are Motley Fool Stock Advisor selections.

Fool contributor Tim Beyers had stock and options positions in Apple and a stock position in Akamai 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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  • Report this Comment On September 14, 2009, at 3:37 PM, Buffetisbest wrote:

    LLNW's EPS estimates for the current and next quarter, and current and next year are in the red, and they have a reported negative FCF. Although they have no debt, I would wait until their earnings go into the black to possibly buy this one.

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