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

Titanium Metals (NYSE: TIE  )

$9.19

*****

260.4%

ClickSoftware Technologies (Nasdaq: CKSW  )

$5.61

*****

193.7%

Hologic (Nasdaq: HOLX  )

$15.13

*****

203.2%

Allos Therapeutics (Nasdaq: ALTH  )

$6.21

****

188.8%

Net Servicos de Comunicacao (Nasdaq: NETC  )

$13.91

***

486.9%

Sources: Motley Fool CAPS, Yahoo! Finance. As of Nov. 6.

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 Ceradyne.

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, 51 stocks made the cut -- including our last topper, Sonus Networks.

My favorite penny stock this week is USEC (NYSE: USU  ) , which sells enriched uranium to commercial nuclear power suppliers. The details:

Metric

USEC

CAPS stars (out of 5)

*****

Total ratings

1,336

Percent Bulls

96.2%

Percent Bears

3.8%

Bullish pitches

245 out of 255

Data current as of Nov. 8.

If this call seems counterintuitive, it should. Last week, USEC reported a 47% year-over-year decline in uranium revenues during the third quarter. Any further downtrend would hurt the company.

Fortunately, there doesn't seem to be one. Spot prices rose in October, and uranium miner Cameco (NYSE: CCJ  ) recently told investors that it expects a 5%-10% increase in 2009 revenue. USEC, meanwhile, recently issued improved guidance; it now expects more than $350 million in operating cash flow this year.

But the big catalyst for USEC is anything but certain: a new $2 billion centrifuge, set to open next year and backed by federal loan guarantees. Or at least, that's how it was supposed to be: In August, the Department of Energy (DOE) backed away from its earlier commitment.

USEC has since taken measures to control costs. According to management, it's exploring "strategic alternatives" such as a company sale. "It is our plan to present a revised and improved financial structure as part of our updated submission to DOE," said CEO John Welch in a recent press release.

What would the company sell for? That's an open question, but USEC's tangible book value is about $1.18 billion as of Sept. 30. The stock trades for less than $1 billion in enterprise value as of this writing. That strikes me as an unreasonable value gap, which should close with any good news from the DOE.

Do you agree? Would you buy USEC 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.

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. Titanium Metals is a Stock Advisor selection. Net Servicos is a Rule Breakers recommendation. The Motley Fool owns shares of Cameco and is also on Twitter as @TheMotleyFool. Its disclosure policy was small and cuddly. Once.


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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.

  • Report this Comment On November 11, 2009, at 11:07 AM, vijay949 wrote:

    "What would the company sell for? That's an open question, but USEC's tangible book value is about $1.18 billion as of Sept. 30. The stock trades for less than $1 billion in enterprise value as of this writing."

    Sir, the Market Value at current stock price is not even close to $1 billion, as you wrote. It is less than half a billion.

    The gap is whopping, and beyond my comprehension.

    I am sure any good news about their Centrifuge project will narrow the gap, and surge should be whopping too.

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