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
It's good to be the king, or at least a bank. Some days the names are interchangeable. The government has turned the keys to the Treasury over to the banks and set up all the rules in their favor. Citigroup, Goldman Sachs (NYSE: GS), and JPMorgan Chase (NYSE: JPM) can then use their access to cheap taxpayer dollars to make gobs of money hand over fist, day after day, without fear of ever losing.

In the first quarter, each of those banks (and Bank of America (NYSE: BAC) too) had perfect track records in trading, never feeling the pain of loss on a daily basis even once. The government lends them money at zero interest rates, but they lend it back to the government at rates of almost 4% by carrying 10-year government notes. For very little money, then, the banks are able to leverage their investment and not have to worry about losing a dime.

As a result, some investors view the unwinding of the government's equity position from Citigroup as the main force holding back its stock right now. CAPS member HDTVBG says it will remain a drag in the short term, but once completed the stock will jump.

Is this the greatest pump and dump play ever or what? The SEC can't handle the wild west of death spiral financing in the penny stock arena, but they at least taught Treasury how to play the game for a profit. This will be a thumbs up once the dilution is done-target around 3.25.

A short circuit
I've already expressed doubts about Qiao Xing Universal Telephone making the switch from mobile handset seller in China to a natural resources company, specifically through the acquisition of a copper and tin mine. But copper is on the outs for the moment. Although appreciably higher than they were last year, copper prices are falling hard as concerns increase about Europe's ability to offset China's declining demand for the industrial metal. Copper is down 20% from its April highs and with China's stock market falling too, reflecting concerns the country may rein in growth too successfully, Qiao Xing could have a difficult time turning the corner on this enterprise.

Investors are still excited that China will drive growth forward at home and abroad, and more than 94% of CAPS members rating the mobile handset seller -- er, natural resources company -- believe it will outperform the broad market averages. Dial up your own opinion on the Qiao Xing Universal Telephone CAPS page on whether it can dig deep for growth.

An array of opportunities
Sprint-Nextel has no such identity issues as it attempts to get its phone business back on track. Partnering with Wal-Mart (NYSE: WMT) to sell a prepaid wireless device, Sprint is benefiting from the strong growth in that segment, estimating 75% to 80% of net additions in the market could go to prepaid. With a new 4G phone also due for an unveiling, Sprint-Nextel has a clear signal for growth.

CAPS member alaskiian calls Sprint underrated, while 1Riptide says it has stripped itself down to its essentials which makes it a dangerous competitor for its rivals.

Sprint has gone through most of the growing pains that other carriers are going through now. Android is changing the marketplace and Sprint will be along for the ride. 
Sprint is lean and mean and has nowhere to go but up, or maybe being acquired...but by today's metrics I feel this company is worth much more than the stock price.

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.