Ah, penny stocks. Quite possibly the world's most dangerous investments ... yet so enticing.

And for good reason. Some of the world's best stock pickers are, at times, penny-stock investors. Peter Lynch, for example, has and still does enjoy the stock market's super-cheap seats. The Royce Low-Priced Stock (RYLPX) fund crushes the market by betting on stocks trading for less than $10 a share. Even the All-Stars in our 100,000-strong Motley Fool CAPS investor-intelligence database dabble in penny stocks. More than a few have been richly rewarded.

Finally, there's our Motley Fool Hidden Gems small-cap service. You won't often find penny stocks on its scorecard, but Foolish colleague Tim Hanson studies rising microcap stars in a segment called Tiny Gems. Current Global Gains pick China Fire & Security (NASDAQ:CFSG) made Tim's list last August. Its shares have risen more than 30% since.

Pennies from heaven
So why not invest in penny stocks? I suppose because the SEC has warned us about them. But what if we take the agency's definition literally, and limit our choices to stocks trading for less than $5 a share? And what if we further limit our choices to four- and five-star stocks whose market cap doesn't exceed $2 billion? Surely our CAPS screener would return some winners. Let's have a look:


Recent Price

CAPS Stars (5 Max)

Percent Bulls

Abraxas Petroleum (AMEX:ABP)








CommTouch Software (NASDAQ:CTCH)




Descartes Systems




Harvard Bioscience




Sources: Motley Fool CAPS, Yahoo! Finance.

Bear in mind that this isn't a list of recommendations. Instead, I offer these stocks as candidates for further research.

My favorite, though, is Webzen, a Korean developer of online games, for many of the same reasons Tim liked China Fire & Security a year ago. Some of the notables:

  • Management is tenured and owns 12% of the outstanding shares.
  • Wall Street doesn't closely follow the stock.
  • Its shares, trading for less than nine times projected 2009 earnings, are cheap compared to regional industry peers NetEase (NASDAQ:NTES) and Sohu.com (NASDAQ:SOHU).

And its market opportunity is still massive, according to CAPS investor s0pran0s. Here's how he pitched the stock in December:

Do you know how many registered users they have? [Editor's note: 56 million at last count.] With the recent money Activision (Nasdaq; ATVI) got, and a industry bigger than the movie industry, this is a great bet. Many companies will be interested in their online gaming technology, and to tap into all of their registered users.

I agree, but I'm even more interested in what you think. Would you buy Webzen at today's prices? Let us know by signing up for CAPS today. It's 100% free to participate.

See you back here next week with five more top penny stocks. Fool on!