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

GigaMedia (Nasdaq: GIGM  )

$4.20

*****

167.5%

Fuel-Tech

$11.85

*****

148.4%

Nuance Communications (Nasdaq: NUAN  )

$13.73

****

253.9%

Gulfport Energy (Nasdaq: GPOR  )

$7.82

****

133.4%

Iconix Brand Group

$12.28

***

176.6%

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 ValueClick (Nasdaq: VCLK  ) .

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, 53 stocks made the cut -- including our last topper, Smith & Wesson Holding.

My favorite penny stock this week is Sonus Networks (Nasdaq: SONS  ) , a provider of infrastructure equipment for Voice over Internet Protocol (VoIP) systems. The details:

Metric

Sonus Networks

CAPS stars (out of 5)

*****

Total ratings

293

Percent Bulls

92.5%

Percent Bears

7.5%

Bullish pitches

34 out of 39

Data current as of Oct. 29.

I'm not much of a fan of the telecom business, or the telecom equipment business, but Sonus is different. You might call it a bridge to the future for legacy carriers such as AT&T (NYSE: T  ) and Verizon (NYSE: VZ  ) . Why? LTE.

For those unfamiliar, LTE, an abbreviation for "Long Term Evolution," is an in-development broadband technology that's backed by the legacy carriers and capable of carrying voice, data, and video. LTE is also a direct competitor to WiMAX. Sonus makes IP telephony equipment that is LTE-ready.

There's risk in betting on a technology that has yet to be widely adopted, but the beatdown Sonus has suffered may be overdone. Cash accounts for more than two-thirds of the company's market value at current prices. That doesn't seem fair; it's too early to give up on the idea that telcos will need Sonus' equipment to make the LTE transition.

Do you agree? Would you buy Sonus Networks at today's prices? Let us know by signing up for CAPS today. It's 100% free to participate. Alternatively, feel free to leave comments in the space below.

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. Nuance Communications is a current Hidden Gems recommendation. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers owned shares of GigaMedia 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.


Read/Post Comments (1) | Recommend This Article (14)

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  • Report this Comment On November 06, 2009, at 1:03 AM, NASDAQCZAR wrote:

    i am gonna buy more sons at open tomorrow big conference call monday should guide higher by sons management sons is a big opportunity at $2 estimates are way off, analysts upgrades coming over next week, go sons!

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