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:

Company

Price+

CAPS Rating (out of 5 max)

CAPS Member

Member Rating

Brocade Communications (Nasdaq: BRCD  )

$4.85

****

bdescent

92.57

Mahindra Satyam (NYSE: SAY  )

$5.07

****

portefeuille9

98.81

RF Micro Devices (Nasdaq: RFMD  )

$4.01

****

stickerstev

90.46

Price when the outperform call was made

The above three companies may be low priced, but that isn't necessarily enough to suggest they'll have an easier time recording big gains. Low-priced stocks are often low-priced for a reason. We have to check and see what their catalysts for growth might be before diving in to the shallow end of the stock pool.

Your two cents worth
Let your stock fall low enough and you can count on acquisition rumors to start burning up the grapevine. Such is the position Brocade Communications finds itself in as it stock has hit new lows, trading under $5 a share and 35% so far this year.

The networking hardware and support for enterprise and service provider isn't a stranger to this sort of rumor mongering, going through similar speculation last year. While Hewlett-Packard (NYSE: HPQ  ) and Oracle (Nasdaq: ORCL  ) are always in the mix, now Dell and Juniper Networks (Nasdaq: JNPR  ) also provide grist for the mill.

While this may be just another round of wishful thinking, it at least makes more sense this time. Brocade turned profitable last quarter from the year-ago period, is generating good amounts of cash, and sports that new, lower stock price. It would be worthwhile for a company to at least make a pitch. Whatever the catalyst for Brocade to move higher, in rating the equipment maker to outperform the broad market averages, CAPS investor bdescent thinks the risk-reward ratio is skewed toward the latter: "Liked them for a long time and this is a good entry with lots of upside."

A short circuit
Despite IT outsourcing firms like Infosys (Nasdaq: INFY  ) reporting strong order growth, Tech Mahindra still gets that drained feeling when it comes to it majority stake in Mahindra Satyam, the former high-flying consultancy that was brought low by an accounting scandal. The costs related to the acquisition have hurt profits and the bill is likely to go higher as the audit of its books draws to a close this fall.

As a result, Satyam has delayed filing financial reports, and the New York Stock Exchange is threatening to delist the stock. The merger that was expected to happen in 2015 or so, is now being fast-tracked and may begin as soon as October.

In looking at Satyam's business, CAPS member kyrocrypt says the key to it recovering is that it hasn't lost as many big contracts as once feared.

great company oversold thanks to an insider scandal...just secured a huge contract for Aadhaar program by UIDAI (Unique Identification Authority of India)...still has a good brand name and has retained key contracts 

this is a stock for the patient investor.

Lack of communication
Not that the Fool pays much attention to technical analysis, but every so often a stock indicates it's a good buy according to such metrics. When that lines up with a fundamental analysis that suggests the business is sound and poised for growth, well, maybe investors ought to take a closer look.

RF Micro Devices would seem to be one such case for the technical books. There are lots of chart squiggles that say it's a buy, but from a Fool's perspective it's the growing profits and returns on equity that say this is one for your portfolio. And with the stock down 20% from last year's levels you'd be buying in at an undervalued price.

CAPS investor sanminasandy says looking at its sound financial condition makes it easy to believe substantial growth lies ahead.

RFMD generating substantial cash flow enabling them to retire debt, build cash position wwhile expanding market opportunities. Growth rate will enable them to become a cash cow within 12-15 months. With this longer term horizon a 20%-30% return is assured.

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.

The Fool owns shares of Oracle. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool's disclosure policy always wins the coin toss.


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  • Report this Comment On August 03, 2010, at 11:37 AM, oliverbd wrote:

    Any thoughts on ARDM? To me it appears way undervalued based on the fact that they have no (ZERO) debt and some income from royalties with Zogenx and the phase iib trial on inhaled cipro appears to be far superior to Bayers inhaled cipro powder test. Bayers program is insane when you consider the quantity of powder someone needs to inhale yet alone thinking about children which it is currently targeting. Igor Gonda at Aradigm appears to have a plan and seem to know what he's doing. Like your articles on other bio's in the past.

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