Making Cents in Penny Stocks

If it rained pennies from heaven, as Bing Crosby once sang, a few storms would sure do our bank accounts some good. But as Fools, we know that penny stocks are dangerous to our financial situation. Because the world of penny stocks is full of shysters peddling manipulation and deceit, it's often hard for investors to separate the few good companies residing there from the multitude best ignored.

Although many people like investing in penny stocks, believing that such stocks have a better chance of increasing many times in value, nothing says that a $20 stock can't double, triple, or quadruple in value just as easily as a cheaper one. Considering that a cheap stock may be cheap for a very good reason, there's ample evidence to suggest that higher-priced stocks may actually have a better chance of going up than cheap ones do.

Still, many investors dabble at the low end of the stock-price spectrum. At Motley Fool CAPS, we note the investors who, more than half the time, rate stocks trading in the single digits, and we give them a saucy name -- "Pennies." Believe it or not, you'll find some of the best CAPS All-Star investors among them.

Pinching pennies
This week, we'll look at some of the low-priced investments these All-Stars have praised or panned. If the best investors who regularly scan this end of the market have singled out these companies, we might want to turn our umbrellas upside-down -- or run for cover!

Some All-Stars believe that these low-priced stocks will outperform the market:

And here's a list of those they think will underperform:

As we delve into the low-priced "pennies," we find that most of the companies, whether they are rated underperform or not, are not particularly well-liked by the rest of the CAPS community. Only go-go juice chain Jamba Juice rates an above-average four stars.

Biotech investing is not for the faint of heart. When even giants like Amgen (NASDAQ:AMGN) face tough times bringing drugs to market that can generate large profits, small-time operations like Discovery Labs can absolutely give investors fits. The company's been trying to get its respiratory ailment treatment Surfaxin approved for a few years now; a decision by the FDA, saying that it will review Discovery's response to a request for more information on it, has some investors hoping that the long-awaited approval may now be in sight.

Almost 150 investors have rated Discovery Labs, with more than two-thirds of them believing it will ultimately outperform the market. In recommending the biotech, CAPS All-Star tuffsledding discloses that he sits on the company's scientific advisory board and finds that its chances of doing well, at least in the short term, are quite good.

I am on the Scientific advisory board of this company, so I would have a conflict of interest if I bought the real stock. On the other hand, I don't think there is any rule against rating a company in CAPS. So, consider this as insider buying.

After two Approvable letters, the odds of getting approved by the FDA are extremely good, as all the issues raised in the Letters have been taken care of. They are gearing up to begin marketing and distribution.

I am not at liberty to discuss the reasons for my optimism, but I think they will do very well in the short - intermediate run.

Make some change
There you have it -- some of the top CAPS investors choosing a number of "penny stocks" to beat or flag the market. What do you think? Should we fill up the change jar with them, or ignore 'em like a discarded coin on the street? Consult our free Motley Fool CAPS investor-intelligence community, where your opinion makes just as much cents -- er, sense -- as any other investor's.

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