The Next Million-Dollar Penny Stock

Penny stocks can make you rich. Need proof? Every one of these multibaggers was once a penny stock:

Sources: Motley Fool CAPS, Yahoo! Finance.

The promise of outrageous returns has periodically made even the world's best stock pickers penny-stock investors. Peter Lynch has and still does enjoy the stock market's super-cheap seats. The Royce Low-Priced Stock fund has beaten the market for a decade by betting on stocks trading near or below $10 a share, including IPG Photonics (NASDAQ:IPGP) and THQ (NASDAQ:THQI).

Even the top-rated All-Stars in our 130,000-plus Motley Fool CAPS community take to penny stocks. More than a few have been richly rewarded.

Pennies from heaven
So why not invest in penny stocks? Well, the warning the SEC issued about them provides one excellent reason to steer clear. But what if we take the agency's definition literally, and limit our choices to stocks trading between $1.50 and $5 a share? And what if we further seek only four- and five-star stocks with a market cap between $250 million and $2 billion? Surely our CAPS screener would return some winners, right?

This week when I ran that screen, 61 stocks made the cut -- including our last topper, Harvest Energy Trust, and former column star Brocade Communications (NASDAQ:BRCD).

My favorite penny stock this week is another Web wonder, Internet Initiative Japan (NASDAQ:IIJI), which has a small but bullish following in our CAPS community:

Data current as of April 22, 2009.

Interestingly, of the CAPS investors who've rated Internet Initiative Japan since the beginning of March, more than half are from our top-performing All-Stars, who rank in the top 20% of the CAPS community. One of them, Trimalerus, argued in a late March pitch that Web service is essential to Japan's economy:

Japan has felt the effects of the global recession worse than most, but one thing that most Japanese cannot do without. It's like investing in agriculture stocks based in India, or water treatment in the Middle East. Some penny stocks are diamonds in the rough and others are lumps of coal, the trick is learning how to distinguish the two.

My guess is that longevity and scale give Internet Initiative Japan an edge that may not be fully reflected in its stock price. (The company went public at north of $31 a share here in the U.S. 10 years ago.) Rising returns on capital over the past few years are also a good sign.

But that's my take. I'm more interested to know what you think. Would you buy Internet Initiative Japan at today's prices? Let us know by signing up for CAPS today. It's 100% free to participate.

See you back here next week with another penny stock from heaven. Fool on!