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

ViroPharma (Nasdaq: VPHM  )

$10.35

*****

208.9%

Actuate

$4.99

****

104.5%

Questcor Pharmaceuticals

$5.12

***

1,037.8%

Advanced Battery Tech. (Nasdaq: ABAT  )

$4.26

**

1,320%

TiVo (Nasdaq: TIVO  )

$10.40

**

153%

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 1-800-Flowers.

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, 54 stocks made the cut -- including our last topper, Quiksilver.

My favorite penny stock this week is Agria (NYSE: GRO  ) , a Chinese agriculture play that the Motley Fool Global Gains is watching closely. The details:

Metric

Agria

CAPS stars (out of 5)

*****

Total ratings

312

Percent Bulls

95.5%

Percent Bears

4.5%

Bullish pitches

28 out of 29

Data current as of Jan. 4.

China has been a hotbed for hot stocks. Universal Travel Group (NYSE: UTA  ) and Sinovac Biotech (NYSE: SVA  ) have quadrupled. KongZhong (Nasdaq: KONG  ) has tripled. Agria, a double over the same period, looks like a laggard by comparison.

But the gap may close sooner than some think. According to Capital IQ, investors price Agria at 0.17 times revenue to enterprise value. Translated, this means that investors are only willing to pay $0.17 for every dollar of revenue the underlying business generates.

That's somewhat understandable. Agria saw revenue fall 30% in 2008 and we don't yet have last year's numbers. Agria also recently suffered through management changes. This is a speculative pick, at best.

Regardless, rural China needs to get more from its fields, and Agria's seeding technology may help. Any success would benefit investors willing to take a chance on the stock at these depressed levels.

But that's also just my take. Would you buy Agria 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.


Read/Post Comments (2) | Recommend This Article (15)

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 January 22, 2010, at 8:37 AM, leaderoftheback wrote:

    Rear mirror viewing is not helpful. Here is a practical word of warning: Those rear view images are larger (or smaller) than they appear.

    I have owned Viropharma since March of 2006, which is most of those 5 years. My position remains under water to the tune of 8%. I have owned TIVO since March of 2007 and am currently up about 70%. Both stocks could have been purchased multiple times for far less than I paid for them over the period of time that I have owned them, and in fact both positions have been in the money repeated times.

    Why is this all important? I also own other "penny stocks" which have similar patterns to TIVO and VPHM. At least two of them are essentially worthless, including ATVI, a CAPS 5 star stock selling for 10.50/share. I purchased two thousand shares at 20 cents a share in the 1980's (then known as Intellivision). So, that $400 investment is now worth $21,000, right? That position is now worth $21.18; yes you read that right, thanks to the magic of reverse splits and a dose of reality. The rear view mirror can show you anything you want to look for.

    The lessons?

    1. The fact that it's a penny stock is irrelevant.

    2. Find better reasons to buy a stock

    3. A penny stock will offer repeated opportunities to buy and/or sell, even when it's no longer a penny.

    How about a list of (previously) 3, 4 and 5 star stocks that have gone belly up? That's a Foolish post I'd like to see.

    CAPS is extraordinarily useful and the CAPS community is peerless. What you get out of CAPS is entirely dependant upon what you put into it; just like real life investing. Study long, study hard, never hurry.

  • Report this Comment On February 05, 2010, at 2:55 PM, bettich wrote:

    I agree totally with "leaderoftheback" caution should be taken seriously.

    - Penny stocks can grow quick and fast but simple incorrect management decisions can have devastating effects. They go whoop whoop and there gone like smoke.

    - None penny stocks sometimes there is something left after the smoke.

    -So do yourself a favor when you find something you like, study it, study it and don't hurry. It can save you bundles. I personally purchased BID x3 times on it's way going down, thinking every time I was getting a deal. When it stopped at 9$, I realized I had helped chop a much needed boost in our portfolio.

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