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

McDermott International (NYSE: MDR  )

$24.84

*****

519.5%

U.S. Global Investors (Nasdaq: GROW  )

$11.78

****

792.4%

Interactive Intelligence (Nasdaq: ININ  )

$18.71

****

461.9%

AsiaInfo Holdings (Nasdaq: ASIA  )

$19.88

***

340.8%

Green Mountain Coffee Roasters (Nasdaq: GMCR  )

$68.93

*

1,414.9%

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 Silicon Motion (Nasdaq: SIMO  ) .

Even the All-Stars in our 140,000-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, 47 stocks made the cut -- including our last topper, ION Geophysical.

My favorite penny stock this week is CapitalSource (NYSE: CSE  ) , a risky stock that's undergone the stock market equivalent of an extreme makeover. Today's details:

Metric

CapitalSource

CAPS stars (out of 5)

*****

Total ratings

1,916

Percent Bulls

96%

Percent Bears

4%

Bullish pitches

281 out of 300

Data current as of Sept. 26.

CapitalSource is shaping up as an intriguing asset play. This one-time real estate investment trust closed Friday's trading priced at roughly half of its tangible book value, Capital IQ reports. Most CAPS investors see that as an unfair discount.

"There are still risks based on covenants on their restructured debt, but barring a complete economic collapse from here it looks like [CapitalSource is] going to be OK," wrote CAPS All-Star investorpoet2 in a recent blog post. He also likes the company's earnings potential:

The new CapitalSource Bank should be an earnings machine once the market improves. For now, I believe book value is a good proxy for the company's worth. The current book value is around $8 per share ... that's about a double from here.

Do you agree? Would you buy CapitalSource 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. Green Mountain Coffee Roasters and Interactive Intelligence are Motley Fool Rule Breakers recommendations. 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 owns shares of CapitalSource and is also on Twitter as @TheMotleyFool. Its disclosure policy was small and cuddly. Once.


Read/Post Comments (0) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 994216, ~/Articles/ArticleHandler.aspx, 11/24/2014 1:20:48 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement