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

GigaMedia (Nasdaq: GIGM  )

$3.27

*****

116.6%

Force Protection (Nasdaq: FRPT  )

$6.52

****

260.2%

NetScout Systems

$15.49

***

230.9%

Seabridge Gold

$22.19

**

662.9%

Savient Pharmaceuticals (Nasdaq: SVNT  )

$15.13

**

473.1%

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 Ivanhoe Mines (NYSE: IVN  ) .

Even the All-Stars in our 160,000-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, Continucare.

My favorite penny stock this week is TransAtlantic Petroleum (NYSE: TAT  ) , an oil and natural gas explorer that has big interests in Morocco, Romania, and Turkey.The details:

Metric

TransAtlantic Petroleum

CAPS stars (out of 5)

*****

Total ratings

19

Percent Bulls

100%

Percent Bears

0%

Bullish pitches

4 out of 4

Data current as of March 11.

CAPS All-Star txtanner lavishes high praise on the company in this January pitch:

Top management team with proven record of success drilling domestically, primarily in West Texas. Now applying their proven methods to larger and more virgin fields in Europe, where costs are lower, energy prices higher and competition is thin.

Europe surely offers opportunity for oil and gas investors. According to a recent report in the U.K.'s Financial Times newspaper, some of the world's largest explorers are preparing to harness natural gas trapped within the continent's massive shale deposits. ExxonMobil (NYSE: XOM  ) is among those trying for a gas breakthrough.

For TransAtlantic, Europe is still an emerging piece of the profit puzzle. The company's Romanian operation accounted for just $2.4 million worth of the company's $81.3 million in deployed assets at the end of 2008. TransAtlantic had $29.2 million in assets deployed in Morocco during the same period.

Yet it's Asia that may be offering TransAtlantic Petroleum its biggest opportunity. Oil & Gas Journal reports the company is preparing to drill at least 18 new wells at Turkey's Selmo oilfield, the country's second-largest oilfield by cumulative production. Selmo is 100% controlled by TransAtlantic.

Why the investment, and why now? Selmo is yielding more. Production rose to an average of 1,715 barrels per day in February from 1,534 barrels per day during the fourth quarter of 2009.

"Definitely will outperform S&P. This stock will be a 10-bagger within the next few years. If you simply look at their assets in Turkey, the existing well spacing, and the infill drilling opportunity there, it is incredible. Then look at the management team and insider ownership. What an opportunity," wrote CAPS investor kkmidtx in a pitch from earlier this week.

He's half-right about insider ownership. Mitchell Malone III is chairman of TransAtlantic's board, but he's also the majority shareholder. According to Capital IQ, his direct holdings account for 13.8% of the company. Dalea Partners, the investment arm of his holding company, Riata Management, holds another 32.2% of TransAtlantic.

Malone ranks 371st on Forbes' most recent list of America's richest with a $1 billion fortune. A good portion of that came in 2006, when he sold a 46% stake in Riata Energy, one of the country's largest drillers, to former Chesapeake Energy (NYSE: CHK  ) president Tom Ward for $500 million, Forbes reports.

There's no way to know for sure if Malone can build TransAtlantic into the sort of drilling empire that Riata became, but I like the odds. So do others: George Soros and T. Boone Pickens have invested alongside Malone.

Now it's your turn to weigh in. Would you buy TransAtlantic Petroleum at today's prices? Let us know by signing up for CAPS today. It's 100% free to participate. You can also weigh in 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. Chesapeake Energy is a Motley Fool Inside Value pick. 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 owns shares of Chesapeake Energy and is also on Twitter as @TheMotleyFool. Its disclosure policy was small and cuddly. Once.


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