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

Oilsands Quest (AMEX: BQI  )

$1.14

*****

235.3%

Yamana Gold (NYSE: AUY  )

$13.86

****

344.2%

BioMarin Pharmaceutical (Nasdaq: BMRN  )

$16.84

****

262.2%

TeleCommunications Systems

$8.74

****

181.9%

Sterling Construction

$17.14

***

245.6%

Sources: Motley Fool CAPS, Yahoo! Finance.

The promise of outrageous returns has periodically made even the world's best stock pickers into 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 GrafTech International (NYSE: GTI  ) .

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, 55 stocks made the cut -- including our last topper, Melco Crown Entertainment.

My favorite penny stock this week is JA Solar (Nasdaq: JASO  ) , a Chinese maker of photovoltaic cells that last appeared in this column in January. Today's details:

Metric

JA Solar

CAPS stars (out of 5)

****

Total ratings

1,352

Percent bulls

95.5%

Percent bears

4.5%

Bullish pitches

156 out of 170

Data current as of Nov. 26.

Can solar rally any more? After a miserable 2008, solar suppliers are producing more income and generating higher returns. Trina Solar (NYSE: TSL  ) beat the average analyst estimate by more than $0.50 per share. Canadian Solar (Nasdaq: CSIQ  ) has also proven to be a winner.

But some investors believe that JA Solar is setting itself apart from both of them -- and the rest of the industry -- by betting on innovations in silicon ink. They may have a point. What we don't know is whether the technology, created by Innovalight, is the game-changer JA Solar and its fans believe that it can be.

For its part, JA Solar's management said during its third-quarter conference call with investors that pricing has hit "the sweet spot," reflecting pent-up demand. Managers also report that orders exceeded capacity by two to three times in September.

Do you believe that's a sustainable pipeline? Would you buy JA Solar 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. BioMarin Pharmaceutical is a Rule Breakers recommendation. 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 has a stock and options position in GrafTech International and is also on Twitter as @TheMotleyFool. Its disclosure policy was small and cuddly. Once.


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  • Report this Comment On November 27, 2009, at 1:55 PM, leoaks wrote:

    A better bet is silver because JP Morgan holds all of the short silver contracts executed.over the last 2 months. They hold about 40% of the comex contracts and commissioner Bart Chilton has proposed position limits in December which should stop the manipulation of the price. If Comex suspends trading due to the untenable short positions silver prices will soar.

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