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, investors often have a hard time separating the few good companies residing there from the multitude best ignored.

Although many people like investing in penny stocks, in the belief that such stocks have a better chance of increasing many times in value, nothing says a $20 stock can't double, triple, or quadruple in value just as easily as a cheaper one can. 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 of 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 that the CAPS community generally likes most of the companies, whether they have an underperform rating or not. Only ailing electronics retailer Circuit City and home-furnishings retailer Cost Plus rate a lowly one star.

They say there's a silver lining to every cloud, and since miner Coeur D'Alene burrows beneath the earth for the shiny metal, it could well have a lock on those cloudy days. With supplies getting scarce, silver prices have tripled from their lows below $5 per ounce in 2003. As a hedge against inflation, precious-metals bugs have long seen gold and silver as the ultimate safe haven. With the Federal Reserve willing to risk such inflation to save the economy from recession, precious-metals miners start to look more appealing. Of course, we've heard that before about silver and its cousin, gold, but Coeur D'Alene has already bounced from recent lows and could continue to benefit from a strong silver market.

Of the 650-plus investors who have rated Coeur D'Alene, 96% of them believe it will ultimately outperform the market. In recommending the miner, CAPS investor NeroSagetrade believes that a stabilizing production operation with good financials equals a ray of sunshine here:

[Coeur D'Alene] Mines should greatly benefit from a decreasing dollar and the Fed's current easing policy on interest rates. I fully expect silver to appreciate by roughly 20% over the next 12-18 months and gold should remain steady around $800 an ounce. Production has shown signs of steadying and revenues look poised to grow by roughly 50% in 2008. CDE is trading at just 11 times forward earnings and I think this could be a very conservative estimate for 2008. If you want to take advantage of rising metal prices I think CDE makes a lot of sense. They also have 90M dollars more cash than debt so they have plenty of sustaining power at their current price. The long-term chart shows a possible break of the downtrend.

Make some change
There you have it -- some of the top CAPS investors choosing a number of "penny stocks" to beat or flag the market. 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.