Making Cents in Penny Stocks

The occasional shower of pennies from heaven might do our bank accounts some good. Alas, Fools can't say the same for penny stocks. They're often subject to manipulation and deceit, making it harder for investors to separate the few good offerings from the multitude best ignored.

Still, many investors enjoy dabbling at the low end of the stock-price spectrum. At Motley Fool CAPS, a "penny stock" is any stock trading under $10, and you'll find some of the best CAPS All-Stars regularly seeking out winning investments there. We identify them with a penny icon.

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 are three low-priced stocks enjoying All-Star support:

^Price when the outperform call was made.

Your two cents' worth
With two of our entrants this week being real penny stocks, investors are required to do even more due diligence before investing. Taking a flier here on the hope they'll change for the better is not acceptable. When stocks trade this low, it's often for a reason, so we need to be more vigilant before diving in.

Now Ambac Financial is no fly-by-night operation. The bond insurer, along with rivals MBIA (NYSE: MBI) and Assured Guaranty, was a respected name in the industry, but ended up being crushed by the implosion of the financial markets and having to pay billions to companies that had bought bond insurance. Now Ambac is on life support.

Last November it warned that if it couldn't get its financial situation straightened out, it would pursue bankruptcy protection. Two months ago it surprised seemingly everyone by posting a profit, but that was largely due to a change in accounting rules. New tax law allowed the company to carry back operating losses in 2008 and 2009 as far back as 2003. While Jim Cramer urged investors to buy into the stock's rally, the more prudent -- and smarter -- option was to just sit on your hands.

Highly rated CAPS All-Star TSIF doesn't recommend Ambac as a real-money portfolio addition because of the many leaks that need to be plugged:

Ambac sits with negative $2 Billion in net tangible assets and minimal cash. From $88 per share in 2007 to $0.60, many speculative investors are in denial, but this is clearly nothing more than a high risk, high stakes, crap shoot.

A short circuit
On the surface, Cell Therapeutics doesn't face the same imminent demise Ambac does. It was recently encouraged by European regulators to include use for children in its application for pixantrone, a treatment for relapsed or refractory aggressive non-Hodgkin lymphoma in patients who have not responded to other treatment options. Cell Therapeutics submitted its original application last September.

Back in the USA, pixantrone is bogged down in the FDA approval process, as the agency was less than enthused with the clinical data the company submitted. One committee member characterized data as not "well designed or well executed." Despite having been given fast-track status, pixantrone could be rejected just like Intermune's (Nasdaq: ITMN) pirfenidone, Dendreon's (Nasdaq: DNDN) Provenge, and even Bristol-Myers Squibb's (NYSE: BMY) belatacept.

Biotechs and pharmaceuticals often engender passion among investors, yet there are questions surrounding pixantrone that need to be answered. However, 90% of CAPS members rating Cell Therapeutics believe it will go on to beat the broader market averages.

Delcath Systems is running into a somewhat similar situation as its drug-delivery system for melanoma patients has met with a lot of skepticism. That has prevented some investors from thinking it still has monster potential, but it's going to have to climb a wall of doubt to get beyond those concerns.

With more than a quarter of the CAPS members rating Delcath also having doubt, it seems they believe there are better places for your money today.

Penny for your thoughts
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.