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

Hansen Natural

$35.42

****

794.4%

U.S. Global Investors (Nasdaq: GROW  )

$13.32

****

732.5%

U.S. Gold Corporation

$2.89

***

528.3%

AsiaInfo Holdings (Nasdaq: ASIA  )

$24.98

***

349.3%

Medifast

$26.69

**

660.4%

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 145,000-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, 56 stocks made the cut -- including our last topper, USEC.

My favorite penny stock this week is Melco Crown Entertainment (Nasdaq: MPEL  ) , a gaming company whose operations are concentrated in Macau, and which first made an appearance in this column last September. Today's details:

Metric

Melco Crown Entertainment

CAPS stars (out of 5)

****

Total ratings

1,170

Percent bulls

95.8%

Percent bears

4.2%

Bullish pitches

187 out of 196

By the numbers, there isn't much to like about Melco Crown. Revenue, though up 69% in the third quarter, failed to meet analyst estimates. The company also remains unprofitable: Melco lost $0.05 per American Depository Share (ADS) in Q3, and that was after positively adjusting for the effects of one-time items.

But not all Melco's numbers are bad. Debt is just 41% of total capital, well below the burdens carried by American peers Las Vegas Sands (NYSE: LVS  ) , MGM Mirage (NYSE: MGM  ) , and Wynn Resorts (Nasdaq: WYNN  ) , all of which also compete in the Macau market.

Really, the bear thesis for Melco makes sense only if you believe there's a finite -- and well-defined -- market for gambling in Macau. I have a hard time believing that, and I'm not alone. The Motley Fool Global Gains team recommends shares of Melco precisely because Macau offers so much room for growth.

"If the economy is truly on the way back (I believe so) the influx of visitors will increase along with it," wrote CAPS investor mountain81 in June. "Macau has easy access to 1/3 of the world's population and a big chunk of them are heading to Macau instead of stagnant Las Vegas."

Do you agree? Would you buy Melco Crown 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. Melco Crown Entertainment is a Global Gains selection. Hansen Natural is a Rule Breakers recommendation.

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 is also on Twitter as @TheMotleyFool. Its disclosure policy was small and cuddly. Once.


Read/Post Comments (9) | Recommend This Article (20)

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.

  • Report this Comment On November 23, 2009, at 11:07 AM, rockportfred wrote:

    I am a "far east rat" - spent 26 years in the military and all assignments were in the far east or the world (US). I know how things work in that part of the world and if anyone can get the whales to part with their money its Mr. Stanley Ho and family! Also being in partnership with Crown Ent, Austraila's top gaming people dosen't hurt. Everytime the stock dips, I dip into my pocket and purchace more shares.

  • Report this Comment On November 23, 2009, at 11:17 AM, jmk909er wrote:

    So what is the "The Next Million-Dollar Penny Stock"? I don't get it. Dosen't a penny stock have to be less than a dollar?

  • Report this Comment On November 23, 2009, at 12:29 PM, sid2286 wrote:

    I believe that a penny stock is one that currently trades for under 5 dollars. I have been wrong in the past though.

  • Report this Comment On November 23, 2009, at 1:28 PM, estabank454 wrote:

    Yes, a penny stock is usually under $5. It normally won't be on a brokers screen until it crosses the $5 level. It is not unusual that " we the people " watch stocks like MPEL, ETFC and SIRI and jump in to buy and hopefully reap the benefits on a surge.

    When you watch CNBC with a streaming posting of stocks purchased, it seems there are a few (rogue buyers or really small cap mutual funds )on the brokers radar screens, because some of the buys are in rather large quantities, betting on the same outcome. UP,UP and AWAY !!!!

  • Report this Comment On November 24, 2009, at 1:44 PM, JimmyhDrake wrote:

    MGM is a great starter for a fresh investor. I am in for 1000 shares, and It has doubled up since March. Another penny stock about to explode is MRNW. It is a per-dium nurseing staffing agency,poised to take advantage of the new Health Care legislation. At .40 cents a share you can't go wrong with this jewl. Home care is going to be the way of 2010, and MRNW supplies nurseing to homes, nurseing homes, hospitals, and provide professional health care professionals, that range from respitory theropy,physical theropy to anisteciology. Any Motly Fool would the future bennefits in store for this stock.

  • Report this Comment On November 24, 2009, at 1:44 PM, topsecret09 wrote:

    Here Is the next million dollar PENNY stock (83 cents)...... http://www.lgdi.net/

  • Report this Comment On December 13, 2009, at 10:05 PM, topsecret09 wrote:

    December 11,2009 ($1.03) http://www.lgdi.net/

  • Report this Comment On December 13, 2009, at 10:32 PM, jddubya wrote:

    @ JimmyhDrake

    Are you sure you don't mean MSNW? I'm heavy into MSNW, they use to be listed as MRN.

  • Report this Comment On December 21, 2009, at 11:06 PM, topsecret09 wrote:

    December 21,2009 ($1.30) http://www.lgdi.net/

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