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.

Although many people like investing in penny stocks, believing they have a better chance of increasing many times in value, nothing says that a $20 stock can't double, triple, or quadruple in value just as easily as a cheaper 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 going up than cheap ones do.

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:

And here's a list of those they think will underperform:

As we delve into the low-priced "pennies," we find, not surprisingly, that those expected to underperform are not well-liked, while those the All-Stars approve of tend to be, well, well-liked. The lowest-rated "outperform" penny stock, FuelCell Energy, can generate as much investor energy as its fuel-cell technology.

Fuel cells tend to draw their power from natural gas, a commodity that has become very expensive lately. For that reason, other alternative fuel sources (solar energy, for example) are becoming more cost-competitive. However, FuelCell Energy may still succeed. Congress is debating the merits of an alternative energy bill that could give a big boost to all fuel-cell companies, including Ballard Power (NASDAQ:BLDP) and Plug Power. In addition, FuelCell may win a big contract soon from Connecticut's public utility department.

More than 400 investors have rated FuelCell, with two-thirds of them believing it will ultimately outperform the market. Earlier this year, CAPS All-Star bcochrane14 felt it was setting the foundation for future growth:

I really like where FuelCell is going with their company vision. They may not be heavy in the green right now, but they're establish[ing] strong foundations while building new expansions.

They just inked a deal to provide 1 MW of renewable energy for a wastewater treatment plant. Saving our environment may not be profit-friendly, but when legal mandates start forcing companies to spend a little green to become a little greener, FCEL will already be far ahead of that curve.

Of course, others -- like All-Star wunderkind pencils2 -- think the future of fuel cells is still far in the future:

1. The company has never reported positive earnings (at least in recent memory), the business has produced -$53.73 million in cash in the past four quarters, and the most recent quarter's profit margin stood at -110.89%.

2. As interesting as fuel cells are, it will be at least several years before it is a source of energy worth producing and using. Someday, maybe, but it will take a lot of cash to keep this baby running for much longer.

3. The only thing keeping the company going is its string of share offerings to the public over the past few years.

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 use them to fill up the change jar, or ignore 'em like a discarded coin on the street? For further research, consult our free Motley Fool CAPS investor-intelligence community, where your opinion makes just as much cents -- er, sense -- as any other investor's.