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. Because the world of penny stocks is often full of manipulation and deceit, investors have a harder time separating 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 good reason. Indeed, a $20 stock may have even better chances of gaining value than a $0.20 one does.

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:

*Price when the outperform call was made.

Buddy, can you spare a dime?
Normally, putting yourself up against national banking giants such as Wachovia (NYSE:WB) would be a mismatch for a regional bank such as Regions Financial, yet in the current economic climate, the Southeast-based bank looks like the better bet these days. True, its host of management issues has some analysts agitating for change at the top, and the company flopped in the second quarter -- profits were down 55% as bad loan provisions rose. But it's still not as bad as Wachovia's performance, which posted huge losses, raised its loan-loss reserves to a whopping $5.6 billion, and slashed its dividend by 87% to just a nickel a share.

Yet even with all of the bad news, most of the banking stocks soared on the results. Go figure.

CAPS member Turtleread has a 12-point list of why he thinks Regions is a regional institution you can bank on. A few of those points follow. The rest are on his CAPS page.

2. This is a Southeast regional bank in Alabama, Arkansas, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, [Louisiana], Mississippi, Missouri, North Carolina, South Carolina, Tennessee, Texas, and Virginia with over 2,000 branch offices.
3. These states are NOT going to let this bank fail ([it's] state chartered).
4. Has an insurance group and wealth management.
5. Sales and income up over 5 yrs. both at 26.1% and 17.8% respectively.
6. Fairly low debt.

A checkup from the neck up
It's no laughing matter that head and neck cancers account for some 3%-5% of all cases, typically in men and those over 50. According to the National Cancer Institute, 85% of the cases are linked to tobacco use. Although one of the better-known therapies for head and neck cancers is Erbitux from ImClone Systems (NASDAQ:IMCL), ArQule is one of a number of biotechs researching other therapies for head and neck cancers. ArQule's own ARQ501 is undergoing a clinical study, along with a number of other treatments for targeting cancer cells. Because it has a number of collaborative agreements with large pharmaceuticals, some believe that ArQule might be considered as a buyout candidate one day.

In his CAPS blog, however, All-Star zzlangerhans believes that while the immediate future is bullish for ArQule, pharmaceutical Roche may end up dropping its collaborative bid on one of its therapies, a move that will eventually cause a decline.

The E2F-1 inhibitor program still looks really bad to me, but it doesn't appear that the company is going to voluntarily discontinue it in the near future as I predicted. Instead, they're rolling out a new E2F-1 (ARQ761) which is simply a pro-drug that reverts to ARQ501 in plasma. My assumption has been that ARQ501 has weak efficacy, explaining its disappearance from the quarterly statements. So ARQ761 seems like a placeholder to maintain share price until better data comes out for ARQ197. However, I suspect that Roche will force the issue by dropping the E2F-1 collaboration at the end of 2008 when the current agreement lapses, rather than picking up the 2009 extension.

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 count as much as anyone else's.