Making Cents in Penny Stocks

The occasional shower of pennies from heaven might do our bank accounts some good, but we Fools can't say the same for penny stocks.

The world of penny stocks is often full of manipulation and deceit, making it difficult for investors to separate its few good offerings from the multitude best ignored. Although some investors think cheaper stocks have a greater chance to appreciate, those stocks may be cheap for a reason. Indeed, a $20 stock may have better chances of gaining value than a $0.20 one.

Still, many investors dabble at the low end of the stock-price spectrum. At Motley Fool CAPS, we award the "Pennies" title to investors who rate stocks trading in the single digits more than half the time. Believe it or not, you'll find some of the best CAPS All-Stars among those players.

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's the latest list of low-priced stocks with All-Star support:

As we delve into the low-priced "pennies," we find that most of the companies are generally well liked by the CAPS community; most are rated four stars or better.

No nervous Nelly
Patents can often make or break a biotech company, and although they're only good until the next big thing comes along to earn a patent, while they're in place they can provide a wide competitive moat. Repligen, developer of central nervous system therapies, has been successful in defending its patents from incursions by other larger, better financed competitors.

Last year it successfully got ImClone Systems (Nasdaq: IMCL) to cough up $65 million because its cancer treatment Erbitux infringed on a Repligen patent. Just the other day it convinced Bristol-Myers Squibb (NYSE: BMY) it was smarter to settle than to go to trial for the infringement the rheumatoid arthritis drug Orencia apparently had on its patents. As Sen. Everett Dirksen purportedly said, "A billion here, a billion there -- pretty soon you're talking real money."

That's probably what CAPS investor boater9384 was thinking in January when the player noted that it's not every day a biotech can get a cash infusion from a settlement:

TONS of cash; small company with some neat drugs in the pipeline. Granted, there won't always be $65 million settlements around but they have $60 million to play with, a $200 million market cap and estimated expenditures of only $3 million next year. Looks like growth all around to me.

Similarly, carolchris95 finds that with its pipeline it looks attractively priced at current valuations.

Repligen Corp. is filling a void with its research and products. This stock has an excellent PE ratio and a good profit margin. I see this stock hitting the $10-$12 for share within 18 months. Maybe sooner, depending on the results of the clinical trials.

When we look at that P/E ratio, we see that Repligen is trading at a discount almost four times less than its industry. With solid wins protecting its patents, this tiny biotech may be onto something big.

Make some change
What do you think? Should we fill up the change jar with these penny stocks, or ignore 'em like a coin on the street? Consult our free Motley Fool CAPS investor-intelligence community, where your two cents count as much as anyone else's.