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
Defaults in commercial mortgage-backed securities hit record levels in the fourth quarter of 2009, and by year end, they're expected to hit 11% of all loans rated by Fitch Ratings. As bad as that sounds, it's actually going to get worse. A lot worse.

The problem spots are the large loans that were written between 2006 and 2008 when the real-estate market was at the height of the bubble. Defaults on those loans are gathering momentum and Fitch expects the 10-year cumulative default rates on CMBS loans to reach 27%. That doesn't bode well for commercial lenders like CapitalSource, CIT Group (NYSE: CIT), or iStar Financial (NYSE: SFI).

CapitalSource just posted a wider-than-expected loss as provisions for bad loans rose 41% in the quarter. CIT Group already went through bankruptcy once last year, and a parade of hedge funds bailed it out. In its most recent quarter, iStar actually posted a narrower-than-anticipated loss, and bad loan provisions dropped for the commercial lender, but it says it doesn't know which way to expect them to go over the next few quarters. I think I have an idea.

CAPS member jc09058 also says not to expect a quick turnaround in commercial real estate, but having husbanded its resources better than most during the upheaval, CapitalSource should come out better than others in the end:

Despite the financial meltdown, I feel that this company has managed it's resources fairly well and hopefully, has resolved all issues resulting from the the sub-prime mess. I do expect that any turn around will be long and the share price will take some time to reflect that. A wait and see.

A short circuit
Analysts might have been disappointed with electronics manufacturing services specialist Flextronics reporting lower revenue due to a components shortage that prevented it from shipping certain products. Yet with the Institute for Supply Managers manufacturing index jumping to 60.4% in April, it's not unwarranted to expect that Flextronics and Jabil Circuits (NYSE: JBL) are seeing improvements. The tech sector is ablaze, and these contract manufacturers are likely to see more business.

Highly rated CAPS All-Star musclemilk13 says Flextronics will also better itself as it cleans up its financials:

i think this will be a good long term hold and in time will clean up its balance sheet. ... Definitely a riskier play due its less than pristine fundamentals/balance sheet but from the reports I have read this is a solid company. Thinking ahout pulling the trigger in my real portfolio after watching the price action next week.

An array of opportunities
With Canadian tax laws changing next year to tax energy trusts, such as Precision Drilling, the same as regular corporations, you're going to see these business convert from the trust structure. Precision Drilling Trust will have shareholders vote on the conversion next week at its annual meeting, and trust Penn West Energy Trust (NYSE: PWE) plans on converting sometime between 2011 and 2012.

In the meantime, investors like CAPS member Beorn10 are looking for drilling services providers like Precision Drilling to prosper despite some recent high-profile disasters in the energy production industry:

The US government may over react to the recent drilling, mining and refining accidents. If the response is to curtail domestic production, then I would expect very high oil and gasoline prices by the summer due to a short term lack of supply. Those companies not tainted by the recent accidents may have an advantage getting authorization to proceed with increasing their production.

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.