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:

Price when the outperform call was made.

As we delve into the low-priced "pennies," we find that most of the companies are generally well-liked -- the CAPS community has bestowed ratings of four stars or better on every company in this list.

Buddy, can you spare a dime?
It's hard to find the silver lining among all the storm clouds hovering over private student loan lender First Marblehead. Without the ability to package the loans and sell them to investors -- the primary way First Marblehead makes money -- shares have plummeted 90% or so over the past year. This is not groundbreaking news, as we know the credit markets have been less than optimal. Then, to make matters worse, FM's loan guarantor TERI filed for bankruptcy. Now comes word that the company’s saving grace -- the $200 million cash infusion promised by Goldman Sachs (NYSE:GS) -- that was supposed to come by the end of June won't be coming till September. Maybe.

Top-rated CAPS All-Star sandvig realizes the risks involved in an investment here, but thinks First Marblehead will ultimately survive the crisis. When the credit thaw arrives, sandvig argues, the company’s former profitable ways will return:

I recognize that this is a very risky pick. I hold no illusions that the credit crisis is nearly over. I am somewhat skeptical about precise calculations of value.

Eventually (I don't know when), the market will stabilize. Student loans will be made. Student loans will be repaid. If necessary, I suspect the government will take action to insure a source of funding for higher education. In the short term, I believe [First Marblehead] will survive. In the long term, I still believe it is a good business.

Shining opportunity
Mining company Hecla is a low-cost silver miner with some gold interests too. It recently sold its Venezuelan gold mines to Rusoro Mining for $25 million. That might have been good timing, as that country's dictator, Hugo Chavez, appears to be taking steps to nationalize the industry, much as he has with oil, cement, and others. Earlier this year, Crystallex (AMEX:KRY) was denied a permit to operate its mine, and others have faced similar constraints.

Yet Hecla's silver interests should keep the company moving forward. The appropriately named CAPS player gotsilver feels it's time for the stock to "go vertical":

Silver is going much much higher that the $17 level at present. Gold is significantly undervalued in relation to both the dollar and oil and silver remains significantly undervalued to gold in all historic terms. Inflation remains drastically under reported by the U.S. governments own numbers and will rise dramtically higher as the next president takes office in 2009.... This should lead to a significant spike in gold and silver prices.... Also look for major silver stocks like HL to go vertical and outperform silver by multiples of 2-3 times. HL will be a favorite stock for the large players over the next 5 years ...

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.