Making Cents in Penny Stocks

If it rained pennies from heaven, as Bing Crosby once sang, a few storms would sure do our bank accounts some good. But as Fools, we know that penny stocks are dangerous to our financial situation. Because the world of penny stocks is full of shysters peddling manipulation and deceit, it's often hard for investors to separate the few good companies residing there from the multitude best ignored.

Many people like investing in penny stocks, believing that such stocks have a better chance of increasing many times in value. But nothing says that a $20 stock can't double, triple, or quadruple in value just as easily as a $2 one. Considering that a cheap stock may be cheap for a very good reason, there's ample evidence to suggest that higher-priced stocks may actually have a better chance of rising than their cheaper counterparts.

Still, many investors dabble at the low end of the stock-price spectrum. At Motley Fool CAPS, we note the investors who, more than half the time, rate stocks trading in the single digits, and we give them a saucy name -- "Pennies." Believe it or not, you'll find some of the best CAPS All-Star investors among them.

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

All-Stars believe that these low-priced stocks will outperform the market:

In contrast, All-Stars think these stocks will underperform:

As we delve into the low-priced "pennies," it's interesting to note that each of the ones pegged to underperform have general investor support, but the All-Stars CAPS investors who rate them all bet heavily against them. None shows this dichotomy more than Thornburg Mortgage; 58% of all investors think it will outperform the market, but 69% of the All-Stars believe it won't.

Considering the state of the housing market, it's not surprising that the lender of single-family mortgages would attract such high negative marks. Most of the All-Stars betting against this stock simply point to the current state of the company's business, figuring that it won't get better anytime soon. For example, top-rated DemonDoug, with a near-perfect 99.98 player rating, thinks of it as many do buggy whips: "Their market is as alive as the typewriter-selling market."

Others, like Ferrari321, think the company is on the brink: "19 to 1 leverage in this housing environment = chapter 11." And that's despite management's assurances that Thornburg won't seek such protection.

Yet for all those All-Stars who remain unconvinced, some, like nycguy, think the worst is over:

TMA underwrites and invests in primarily JUMBO and super-JUMBO loans. These are loans to high-earners, full-doc loans.

They really have a quality MBS portfolio that really got smoked in the sub-prime mortgage. Now that the contagion is over in the sub-prime market, I'm betting some sanity returns to the MBS market in general.

I think a lot of firms like CFC are in for some long-term pain, but TMA is really a niche player. Bottom fishing here.

Make some change
There you have it -- some of the top CAPS investors' reasons why these "penny stocks" may or may not be a good investment. What do you think? Should we fill up the change jar with them, or ignore 'em like a discarded coin on the street? Consult our free Motley Fool CAPS investor intelligence community, where your opinion makes just as much cents -- er, sense -- as any other investor's.

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