Making Cents in Penny Stocks

The occasional shower of pennies from heaven might do our bank accounts some good. Alas, Fools can't say the same for penny stocks. They're often subject to manipulation and deceit, making it harder for investors to separate the few good offerings from the multitude best ignored.

Still, many investors enjoy dabbling at the low end of the stock-price spectrum. At Motley Fool CAPS, a "penny stock" is any stock trading under $10, and you'll find some of the best CAPS All-Stars regularly seeking out winning investments there. We identify them with a penny icon.

Pinching pennies
This week, we'll look at some of the low-priced investments these All-Stars have praised. If the best investors regularly scanning this end of the market have singled out these companies, we might want to turn our umbrellas upside-down -- or run for cover!

Here are three low-priced stocks enjoying All-Star support:

+Price when the outperform call was made.

Your two cents worth
As oil prices have risen in response to global economic conditions, Callon Petroleum was able to record higher profits. Its average realized oil price was 23% above the year-ago period, but natural gas prices were 6% lower. Expect that to continue for the immediate future anyway as oil jumped 4.5% on the news that Europe agreed on a bailout plan for Greece, and possibly the rest of the so-called troubled PIIGS: Portugal, Ireland, Italy, and Spain. And if the crisis is really resolved (don't hold your breath), some expect oil to continue climbing back into the mid-$80 range.

Potentially mucking up Callon's resurgence, let alone the coastline, is the oil spill from the Transocean (NYSE: RIG) rig at the BP (NYSE: BP) drilling site. Callon operates in the Gulf of Mexico as well as onshore in Louisiana and Texas. Coincidentally, Callon's Gulf assets were purchased from BP and it was looking for Gulf operations to generate the majority of its operating cash flow this year. With the oil still leaking and the slick lapping at the shores, Congress is going to be examining industry regulation.

A short circuit
Like all venture capitalists, nanotech investment company Harris & Harris has an exit strategy to realize the profits from backing these tiny startups. Yet the economic and financial upheaval hasn't been kind to it, and most of its investments are producing negative cash flows. That requires follow-on financing to let them continue their operations, and tight credit gets in the way of their being able to perform up to expectations. One would imagine it also prevents Harris & Harris from getting a good price to exit their investments if they so chose, impacting its liquidity. But with 42% of its total assets in Treasuries and cash at the end of 2009, that shouldn't be a problem for this VC.

If capital markets continue to improve, Harris could IPO some of its portfolio candidates. Biotech investor Rodman & Renshaw (Nasdaq: RODM) was able to complete 13 financing transactions last quarter, and it has a pipeline of 11 IPO candidates it still finds promising, even though its results missed expectations.

Highly rated CAPS All-Star mrindependent says Harris & Harris only needs a normalized environment to realize its own potential:

Harris & Harris Group is a non-diversified business development company that specializes in nanotechnology and other microsystems. The company is currently selling for a few pennies over NAV. As an early stage venture capital fund, this investment is highly speculative, but the upside appears to outweight the downside. In a "normal" investing environment, a company with this much "sizzle" would command a significant premium to NAV.

An array of opportunities
As Jamba's smoothie stands proliferate around the country, comparisons of its growth potential to that of a young Starbucks (Nasdaq: SBUX) become common. But the rumor mill also sees the coffee house buying up Jamba in a bid to capture some of its older glory days.

That scenario doesn't seem so far-fetched. Starbucks has been trying a lot of out-of-the-box thinking lately to fend off the competition. With every burger joint now thinking it can be a gourmet coffee shop, too, Starbucks would certainly do a nice end run around them by snapping up Jamba and bringing the popular smoothie treat in-house.

Even without all the buyout talk, CAPS member Jasehawk thinks Jamba has plenty of growth levers it can pull on its own:

Jamba Juice is very undervalued. The market value of the company owned stores and the cash in the bank is $126 million, locking in a large portion of the fully diluted market cap of $218 million. Licensing agreements, menu expansion, and adding new stores all will culminate in a much stronger and profitable Jamba.

Penny for your thoughts
Should we fill up the change jar with these penny stocks, or ignore 'em like a discarded coin on the street? It pays to start your own research on these stocks on Motley Fool CAPS. Read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made -- all from a stock's CAPS page. Consult our free CAPS investor-intelligence community, where your two cents count as much as anyone else's.