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.

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 members.

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.

Your two cents' worth
It looks like we'll be able to include Indian IT firm Satyam Computer Services along with Enron, Worldcom, and Bernie Madoff in the list of the biggest investor scams. It was only a few weeks ago that the market spanked Satyam's shares as it tried to sneak through an acquisition of two family-run businesses. The market was aghast that all of Satyam's cash would disappear to buy the overvalued firms, one in real estate and the other in infrastructure -- two industries that wouldn't exactly mesh with IT outsourcing.

Yet when management immediately backed down from the bid, the market seemed to forgive it a bit. Shares that had fallen by 50% or so on the original announcement regained 30% when it called off the purchases. That goodwill came completely undone today when Satyam Chairman Ramalinga Raju admitted he'd cooked the books. At a time when Infosys (NASDAQ:INFY) was feeling the effects of the recession and scaling back guidance, it seemed as though Satyam was rolling along. Now we know why. More than $1 billion listed as assets on the company's balance sheet were nonexistent.

It would have been difficult for CAPS members to know there was fraud afoot. Investors operate under the assumption that most companies are honest and that accountants are the gatekeepers protecting against such massive shenanigans. For that reason, we shouldn't be surprised that more than 97% of all CAPS members rated the stock an outperform, believing the worst of the news was behind the company and IT services would continue to be a profitable niche to mine. However, that is likely to change and it will likely lose its four-star status.

Motoring on
Of the three Detroit automakers, only Ford didn't need to accept a government handout at this time, though it supported the loans General Motors (NYSE:GM) and Chrysler got. It made the difficult decisions sooner than its rivals, but it's still too early to tell whether it will have the resources to survive. The industry has entered unchartered territory, where even foreign automakers are suffering losses for the first time in a long time (if not the first time in their existence).

CAPS member GlobalPD thinks the U.S. automakers will make it through the crisis and Ford will be leading the way forward:

My vote for the American auto industry. If they go out of business, it will murder hundreds of thousands of families, my brothers included. Doesn't take much research to know that they are well positioned to manage through the downturn, and are coming out with technologies to compete with Toyota. I predict that as our nationalism grows with Obama at the helm, many folks (like me) that bought foreign in previous years, will take a long look at themselves in the mirror, and buy products that support US families.

Penny for your thoughts
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? It pays to start your own research on these stocks on Motley Fool CAPS. Read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made, all from a stock's CAPS page. Consult our free CAPS investor-intelligence community, where your two cents count as much as anyone else's.

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