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

Jinpan International (NYSE: JST  )

$24.13

*****

709.7%

Titanium Metals (NYSE: TIE  )

$11.78

*****

211.6%

Rockwell Medical Technologies (Nasdaq: RMTI  )

$7.85

*****

138.6%

Quidel (Nasdaq: QDEL  )

$13.05

****

184.3%

Yanzhou Coal Mining (NYSE: YZC  )

$21.11

***

162.9%

Sources: Motley Fool CAPS, Yahoo! Finance.

The promise of outrageous returns has periodically turned 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 Silver Standard Resources (Nasdaq: SSRI  ) .

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, 56 stocks made the cut -- including our last topper, RF Micro Devices.

My favorite penny stock this week is Conexant Systems (Nasdaq: CNXT  ) , a specialist maker of chips and other products for audio and video. The details:

Metric

Conexant Systems

CAPS stars (5 max)

****

Total ratings

291

Percent bulls

87.3%

Percent bears

12.2%

Bullish pitches

36 out of 40

Data current as of Feb. 19.

"New suite of products for inkless photo printing (zinc and zinc paper) and other products in the imaging field to numerous to list. CEO thinks highly enough to buy 125,000 shares on open market," wrote CAPS investor donsguesswork last month.

He's right. CEO Scott Mercer began his buying in mid-November, with his last purchase in late January: 25,000 shares at $3.89 apiece.

The stock has rallied by an additional 29% since, but Mercer could buy still more at present levels. Conexant trades for 8.6 times next year's expected profit, well below the 20% average annual earnings growth analysts project over the next five years.

Now it's your turn to speak up. Would you buy Conexant Systems at today's prices? Let us know by signing up for CAPS today. It's 100% free to participate. You can also weigh in by using 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, including Jinpan International.

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. Titanium Metals is a Motley Fool Stock Advisor selection. Its disclosure policy was small and cuddly. Once.


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

Comments from our Foolish Readers

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  • Report this Comment On February 24, 2010, at 9:42 AM, TaylorStroh wrote:

    Love that you guys have RMTI on this one! I have a little blog about RMTI you guys can check out.

    Overall do your research on the stock, but do not overlook the science of this stock and what be the catalyst for the move higher thier new drug SFP.

    I mean on sceince of the stock of the sceince of the drug! Its amazing and everything that we have seen looks very good. Phase IIb is coming out in the next month, if its good, and everything points to it is (no issues or saftey concerns whatsoever) this stock is ready to rip!

    Good one to take a look at and take a look at my little blog if you want some more into info.

  • Report this Comment On February 24, 2010, at 9:43 AM, TaylorStroh wrote:

    intro* info, sorry i wrote that comment fast as i have a meeting to get to! haha! sorry.

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