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 charm.

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
Earlier this year biotech Exelixis decided enough was enough and it needed to focus more on the birds it had in hand instead of the flock in the bush. The company doesn't have any products of its own on the market, instead earning money from contracts and licenses. It apparently felt things were getting a bit unwieldy with its collaborative agreements with sanofi-aventis, Bristol-Myers Squibb (NYSE: BMY), and Genentech, as well as the numerous products it has in its pipeline.

To focus matters, it announced in March it was lopping 270 positions and halting new drug development until all the threads it currently had in hand could be combined. Shares of Exelixis has fallen 38% so far this year, and they're down 14% over the past month. That despite reporting that contract revenue had nearly tripled to $19.7 million in the first quarter while licensing revenues surged 32%.

Although it's been facing some costs related to this restructuring that have dampened earnings, it should be in a better position regarding its cost structure. Highly rated All-Star and CAPS biotech guru zzlangerhans views these developments favorably, noting that Exelixis's issues were never about funneling more drugs into its pipeline:

The story with Exelixis for years has been balancing the market cap with copious quantities of faith and patience, or lack thereof. The current downward momentum was accelerated by the company's announcement of a 40% reduction in workforce and a restructuring of the pipeline to focus on partnered compounds. For longtime followers of Exelixis, that news is not unwelcome. Exelixis never had problems bringing new compounds into the pipeline, they've just been very slow to progress them. So hopefully a narrowing will be followed by a lengthening.

A short circuit
Chinese steel producers are pushing back against the 30% price hikes that BHP Billiton (NYSE: BHP) and Rio Tinto are apparently trying to impose on iron ore, and they're calling for a single, unified price for all imported iron ore, which they've done since 2008. Falling prices for steel at the same time that costs are rising may cause Chinese producers to cut back on output.

Even so, it's hard to find investors who aren't bullish about Chinese steel producer General Steel Holdings. Most apparently believe, as SIO394 does, that General Steel's cost containment policies will insulate it from the worst ravages of any pullback:

Simply put, The company is finding ways to manage costs when demand is down, for example: General Steel (China) Co., Ltd has entered into a Lease Agreement with Tianjin Daqiuzhuang Steel Plates Co., Ltd., a related party of the Company. This will allow the Company to reduce overhead costs while providing a recurring monthly revenue stream from rental payments. When demand picks up again, the company will have positioned itself for a nice upside pop.

Chemically bonding
Despite the many signs of a double-dip recession that appear to be all around us, even perma-bears like me have a tough time reconciling the often contradictory indicators of economic growth that abound. Take the performance of chemical giants Dow Chemical (NYSE: DOW), DuPont (NYSEL DD), and Huntsman, all of which reported strong growth in volumes in recent weeks and were cautiously hopeful about the trends continuing for the rest of the year. Because of their commercial and industrial uses, the chemicals industry can be a good indicator of future growth in the economy.

CAPS member alandefeld noted earlier this year that Huntsman was initially a turnaround play for its failed acquisition of Hexion. Now it's just an solid, undervalued company:

Huntsman started out as a special situation based on the failed Hexion acquisition and subsequent lawsuits against erstwhile financial backers. These events, along with the high price of oil pre-recession, severely depressed Mr. Market's view of the company's value. While the value has come up in my estimation, I believe that it is still undervalued

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.