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 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 the group of companies is well-liked by the CAPS community, as most are rated four stars or better.

Small stuff, big growth
You might not realize they're in there, and you sure can't see them, but Shengdatech's nanoparticles are in everything from tires to building materials, paper to paint. Think of them as fillers that reduce costs and improve a product's functionality. Businesses have used such fillers for years, but Shengdatech is one of the first to bring it to the nanolevel, and demand has been soaring.

In Shengdatech's just released 2007 earnings report, it states that revenues for the nanoparticle business more than doubled, primarily as a result of it increasing its manufacturing capacity. Nano-precipitated calcium carbonate (NPCC) -- essentially lime -- now accounts for nearly 50% of Shengdatech's revenues, up from just 30% a year ago. A single analyst provides earnings expectations, which are at $0.62 a share for the full year. That would make for 24% growth from last year and has the stock trading at just more than 11 times forward earnings, making it seem particularly cheap at these prices.

Combine a patented process, huge growth potential, and a cheap price and you'll find investors savoring the possibilities. Almost 700 investors have rated Shengdatech on CAPS and 98% of them think it will outperform the market. CAPS investor Galen8844 saw unlimited potential in this pitch written a month ago:

A China chemical mfg. company who recently just received a patent for [its] process and is ... building a second [production] plant ... This product has unlimited sales [prospects] as it [is] used in products from paint to rubber. Just recently came up with a new use in ink jet paper that improves the quality and reduces the cost ... Also has been increasing EPS ... Apparently good research & [development] ... [T]his is a sound company with [excellent] management.

Others, like CAPS player srracer, point out in late January that the tire industry in China will need Shengdatech's products to help it keep costs low as demand for cars, tires, and similar industries expands:

Simply put, these guys make fillers so that their customers can make cheaper products. My take is that the Chinese auto industry is going to skyrocket ... as such, Tire manufacturers in china are going to need to make LOTS and LOTS of tires. TO make them cheap, they want to use fillers. Who is best going to profit from that? [Shengdatech].

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.