Making Cents in Penny Stocks

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

Still, many investors dabble at the low end of the stock-price spectrum. At Motley Fool CAPS, we award the "Pennies" title to investors who rate stocks trading in the single digits more than half the time. Believe it or not, you'll find some of the best CAPS All-Stars among those members.

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's the latest list of low-priced stocks with All-Star support:

*Price when the outperform call was made.

Your two cents worth
The number of previously formidable companies that now rank among the detritus of penny stocks is staggering. Yet Wachovia's absorption by Wells Fargo (NYSE:WFC) created a sound base for recovery for the sprawling banking concern. CAPS member investmentguru30 recently blogged that the $800 billion in deposits Wells received, along with its own size and scope, add up to some hefty competitive advantages:

Wells Fargo is probably the best capitalized of the major banks. The recent addition of Wachovia has given Wells Fargo about 800 billion in deposits. Wells Fargo size is a major competitive advantage ... Wells also has excellent management. Wells Fargo management have already accounted for a 74 billion dollar writedown of Wachovia's total loan portfolio. This should reduce Wells exposure going forward... Wells has historically had a 22% profit margin and solid ROE of 18% over the last five years. It doesn't hurt that Warren Buffett loves Wells Fargo and has owned it for years.

JPRutledge thinks that when Time Warner finally spins off AOL, not to mention Time Warner Cable (NYSE:TWC), it will re-emerge as an entertainment and media juggernaut.

Time Warner will narrow its focus and expand its reach by casting off its most-horrendous acquisition (AOL) in the next year. This jettisoning will allow the organization to focus on the traditional media and entertainment markets it knows so well. As a result, its bottom line will improve dramatically over the next five years ---- and its multiple will expand significantly.

Making change
As solid state drives become more prevalent and important, SanDisk is striving to produce better-performing, more reliable drives. Its recently unveiled advanced flash file management system may help thwart the decline the recession will impose on all aspects of the semiconductor sector. CAPS member mad02 figures SanDisk has the intellectual portfolio to turn things around: "This is a bet on [SanDisk's] IP portofolio and that the economic downturn we are facing doesn't turn into a 1930's style depression lasting more than 4-6 quarters."

Penny for your thoughts
What do you think? 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.