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 seem generally well-liked by the CAPS community. Almost all are rated three stars or better.

An uncomfortable feeling so far
A good night's sleep is something to treasure, and at several thousand dollars for one of the company's mattresses, you'd think that investors in Select Comfort would be sleeping soundly. Nope -- unless they were as dead as the company's stock has been. Since the mattress maker was first picked by Motley Fool Hidden Gems, its shares have fallen 70%, marking one of only a few times that a selection has kept subscribers up at night.

It looks like they won't be getting any sleep tonight, either. The maker of the Sleep Number mattress reported yesterday that profits fell a nightmarish 80% last quarter. As the economy has slowly begun its tailspin, shelling out $5,000 for a mattress has become less of a priority, it seems, however comfortable that mattress may be.

That hasn't stopped CAPS investors, though. More than 3,500 have rated the stock, and 90% see it ultimately outperforming the market. (When you consider how Select Comfort has done thus far, that might not say much about the market's prospects going forward.)

CAPS investor blitzen94 wrote a couple of months ago that he's forever hopeful that a company able to generate prodigious free cash flow, as Select Comfort does, has the potential to be a great investment in the future -- even when it acts like a wounded animal:

Too cheap for a company that's consistently cash flow positive... Yes, there are problems. Management doesn't seem exceptional in any particular area; marketing just can find either a good message or a good medium; their inability to forecast their earnings (yet doing so twice/quarter!) is troubling... These are all fixable and people speak very well of the product. I'd call this a decent company at a great price... Ever hopeful...

Hoping is a good start today, considering the company's earnings report. Management has indicated that it's raised prices on some models to cover the increased costs of raw materials. That doesn't seem to suggest people will start buying more beds, especially when they haven't been carting them home at current prices.

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, where your two cents count as much as anyone else's.