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The Next Million-Dollar Penny Stock

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


Recent Price

CAPS Stars (Out of 5)

5-Year Return

McDermott International (NYSE: MDR  )




U.S. Global Investors (Nasdaq: GROW  )




Interactive Intelligence (Nasdaq: ININ  )




AsiaInfo Holdings (Nasdaq: ASIA  )




Green Mountain Coffee Roasters (Nasdaq: GMCR  )




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:



CAPS stars (out of 5)


Total ratings


Percent Bulls


Percent Bears


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.

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Tim Beyers

Tim Beyers first began writing for the Fool in 2003. Today, he's an analyst for Motley Fool Rule Breakers and Motley Fool Supernova. At, he covers disruptive ideas in technology and entertainment, though you'll most often find him writing and talking about the business of comics. Find him online at or send email to For more insights, follow Tim on Google+ and Twitter.

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