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

Nuance Communications (Nasdaq: NUAN  )

$14.68

****

230.6%

Iconix Brand Group (Nasdaq: ICON  )

$12.80

****

156.5%

Harbin Electric

$17.37

***

403.5%

AsiaInfo Holdings (Nasdaq: ASIA  )

$23.66

***

392.9%

AspenBio Pharma

$2.20

***

260.7%

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 Fifth Third Bancorp (Nasdaq: FITB  ) .

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, Mahanagar Telephone Nigam.

My favorite penny stock this week is solar-power components maker ReneSola (NYSE: SOL  ) . The details:

Metric

ReneSola

CAPS stars (out of 5)

*****

Total ratings

1,027

Percent Bulls

97.7%

Percent Bears

2.3%

Bullish pitches

120 out of 123

Data current as of Feb. 7.

ReneSola occupies an important niche, argues my Foolish colleague Matt Koppenheffer. "Instead of trying to build the best mousetrap, ReneSola is providing springs to the mousetrap manufacturers," Matt wrote in a June CAPS pitch. "To me, that makes ReneSola a better pick to capitalize on the potential of solar power overall."

Mr. Market doesn't appear to agree; Matt's pick has underperformed the wider market by more than 48 percentage points as of this writing. But that doesn't make the bears right.

This components supplier to Suntech Power (NYSE: STP  ) , JA Solar (Nasdaq: JASO  ) , and others trades for a small premium to tangible book value, and less than 15 times next year's earnings. Not bad for a niche player in a massive-growth industry, eh?

Seriously, I'm asking. Would you buy ReneSola 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. Nuance Communications is a Motley Fool Hidden Gems pick. Suntech Power is a Motley Fool Rule Breakers recommendation. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is also a member of the 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's disclosure policy was small and cuddly. Once.


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