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

American Oriental Bioengineering

$4.22

*****

187.1%

U.S. Global Investors (Nasdaq: GROW  )

$9.95

****

380.7%

Sharps Compliance

$7.32

***

624.8%

LivePerson (Nasdaq: LPSN  )

$6.61

***

166.4%

3Com (Nasdaq: COMS  )

$7.54

**

102.1%

Sources: Motley Fool CAPS, Yahoo! Finance, and Capital IQ (a division of Standard & Poor's).

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 Gammon Gold (NYSE: GRS  ) .

Even the All-Stars in our 150,000-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, 50 stocks made the cut -- including our last topper, ReneSola.

My favorite penny stock this week is RF Micro Devices (Nasdaq: RFMD  ) , a components maker for mobile devices. The details:

Metric

RF Micro Devices

CAPS stars (out of 5)

****

Total ratings

620

Percent Bulls

93.9%

Percent Bears

6.1%

Bullish pitches

84 out of 91

Data current as of Feb. 15.

I like this stock for a couple of reasons. First, I like the trend in the numbers. RF Micro Devices has enjoyed a steady rise in gross margins and returns on capital in the last few quarters.

Second, I like that the company's customer list includes Nokia (NYSE: NOK  ) and Motorola (NYSE: MOT  ) , and I can appreciate why they're buying from RF Micro Devices. RF Micro's chips are, effectively, tiny radios that allow wireless devices to connect with wireless infrastructure such as cell towers, Wi-Fi networks, etc.

Last month, RF Micro beat analyst expectations for third-quarter profits as revenue soared 24%. And yet the stock still trades for less than 9 times the next 12 months' estimate for earnings. I can't imagine investors allowing this stock to continue trading at such a discount for long.

But that's my take. Now it's your turn to weigh in. Would you buy RF Micro Devices 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.

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. Nokia is an Inside Value recommendation. 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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