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

Allos Therapeutics (Nasdaq: ALTH  )

$6.58

*****

174.2%

Female Health (Nasdaq: FHCO  )

$4.73

*****

136.5%

ClickSoftware (Nasdaq: CKSW  )

$7.00

****

144.8%

Eldorado Gold (NYSE: EGO  )

$14.17

***

320.3%

STEC (Nasdaq: STEC  )

$16.34

***

255.2%

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 Timberland   (NYSE: TBL  ) .

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, 60 stocks made the cut -- including our last topper, Newpark Resources.

My favorite penny stock this week is Quiksilver (NYSE: ZQK  ) , a disaster of an apparel retailer that's attempting a recovery. The details:

Metric

Quiksilver

CAPS stars (out of 5)

****

Total ratings

258

Percent Bulls

87.9%

Percent Bears

12.1%

Bullish pitches

43 out of 52

Data current as of Jan.4.

Many Fools are skeptical of Quiksilver, and with good reason. The retailer last turned a full-fiscal-year profit in 2006. Revenue was down 12.7% last year. Debt equaled more than 235% of equity as of October. As CAPS investor alexpaz writes here, by the numbers, this looks like a business teetering towards bankruptcy.

This CAPS member may very well be right. Yet management's divestiture of ski gear maker Rossignol, and other moves it made to refinance debt, may produce results sooner than expected. Look at cash flow. Quiksilver produced more than $100 million in operating cash flow during the fiscal third quarter ended in July.

CAPS investor Windsurfing1 sees this and other recent moves to amplify the core business as leading a recovery, per comments to this article: "Great brand with great products and market leader. New women's line is picking up and will add more sales."

I agree, but that's also just my take. Would you buy Quiksilver at today's prices? Let us know by signing up for CAPS today. It's 100% free to participate. You can also weigh in via the comments box 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. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is also a member of the Motley Fool Rule Breakers stock-picking team. He 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.


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