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. Though some investors think cheaper stocks have a greater chance to appreciate, those stocks may be cheap for a reason. Indeed, a $20 stock may have even better chances of gaining value than a $0.20 one.

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:

As we delve into the low-priced "pennies," we find that most of the companies are a generally well-liked bunch by the CAPS community, as indicated that they have three-star or better ratings.

Coal to Newcastle
China Direct is a management company looking for ownership positions in medium-sized companies. It also does consulting for companies based in China that want access to the capital markets here. If you can't figure out how you want to invest in China's best opportunities, an investment in China Direct gives you perhaps the opportunity to invest in all of them.

Its mainstay has been magnesium, which accounted for nearly 60% of its revenues last year and which continues to drive performance today. Revenues in China Direct's fourth quarter rose 31% sequentially from the third quarter as continued investments in magnesium and so-called clean technology. The acquisitions it has made in the metals field drives it closer to becoming the top magnesium producer in the world.

The cornering and domination of the magnesium market is attracting investors like swissrobinson, who notes that it helps reduce the weight of automobiles, which is useful in meeting increased demand for more fuel-efficient cars. "CDS VP reports company being biggest global magnesium player from 2008. Magnesium is good at reducing weight in cars and should see significant increase in output and prices in the coming years, while the price of alternative materials remain high."

Top-rated CAPS All-Star seadragons likes China Direct because it provides a broad investment on the country's growing economy and noted back in January that you could do so without having to pick and choose among the potential winners.

With CDS' strength in locating the good investments in the China market and its practice of participating in the equity growth of the deals it brokers, CDS is a slick way to make a diversified investment in the China market without having to fiddle with foreign exchanges.

The book value of CDS holdings will continue to reflect the suppression of the value of the renminbi for so long as the Chinese government can maintain it, and will continue to reflect the relative illiquidity of the underlying investments for the foreseeable future. However, this merely explains why CDS makes a good buy: the companies are good, and the Chinese currency they produce in profits will be worth more and more as China's currency approaches its actual value.

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.