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 harder for investors to separate its few good offerings from the multitude best ignored. Though 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 even 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
Now we'll look at some of the low-priced investments these All-Stars have praised. If some of 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:

^Price when the outperform call was made.

As we delve into the low-priced "pennies," we find that most of the companies are well-liked in CAPS, because most have ratings of four or more stars.

Cold-rolled opportunity
As China's economy grows, the country increasingly relies on steel to build its infrastructure. The recent earthquakes point up the need for better building practices. Sutor Technology, in the middle of a series of growing spasms, has been enjoying the benefits of demand.

In its latest quarter, revenue for the Chinese manufacturer of steel finishing fabricator products doubled to $7.79 million, primarily as a result of cold-rolled steel products. After changing its name from Bronze Marketing last year, Sutor then made the leap from the bulletin boards to the Nasdaq.

Yet the company's CEO resigned just before its earnings were announced, though reportedly he's staying with the company to work on new opportunities. Shares, which peaked at around $9 each, have fallen back nearly 20%. At just 11 times trailing earnings, however, the stock does not seem overpriced -- particularly when compared with China Precision Steel (NASDAQ:CPSL), which trades at more than two-and-a-half times that level.

Investors also remain bullish on Sutor's prospects. CAPS player BetterBizBooks writes that China Precision seems to be growing faster, which may justify its higher multiple.

Capacity growth will be 300% [for Sutor], which would seem to indicate, to me, that they are planning HUGE sales growth. Margins should get hurt as they ramp up all this production so it wouldn't surprise me to see their [profit-and-loss statement] get impacted as well.

My primary concern here is that the top line growth of 30% isn't exactly a "barn burner" vs. expanding production by MULTIPLEs of current capacity. As a [comparison] I would point out that CPSL is growing at nearly 100% [year over year].

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