Penny stocks have cleaned up lately. Two hundred U.S. stocks with market caps over $200 million have tripled or more in the past six months, and of those, nearly 80% of those triples traded at $5 or less per share in late February. Here's a selection of February's penny stocks and their recent fates:


6-Month Gain

Current Share Price

CAPS Rating (out of 5)

Avis Budget Group (NYSE:CAR)




Human Genome Sciences (NASDAQ:HGSI)




Vonage Holdings (NYSE:VG)




Sirius XM Radio (NASDAQ:SIRI)




Ford Motor (NYSE:F)




Data from Capital IQ, a division of Standard & Poor's.

Look at those juicy returns!
Wow! It's rare to see dozens of stocks rising that much so quickly all at once. We all really should've been buying penny stocks, right?

Not so fast. Remember that late February was arguably the darkest hour of this recession. The global financial system looked ready to topple if you looked at it crosswise. Ford traded at $1.98 a share; Avis stock changed hands for $0.44 a stub. These stocks were priced so that as long as the companies survived, the shares would go up. But back then, whether they'd survive at all was far from certain.

Pitfalls and pratfalls
In addition, just looking at penny-stock winners only gives you half the story. Some household names that traded at low levels for months, such as Circuit City, have gone out of business entirely. Many more are in bankruptcy, including paper giant AbitibiBowater and theme-park veteran Six Flags, and their shares will likely be worthless. Often, penny stocks simply never recover.

Those that do recover, however, often need extraordinary events to help them out of their troubles. Consider:

  • Human Genome Sciences got a critical FDA approval for a Lupus drug developed together with British pharma titan GlaxoSmithKline (NYSE:GSK).
  • Avis landed some much-needed financing, and then business started picking up.
  • Ford bucked the trend of American car company bankruptcies and has gotten some big help recently from Cash for Clunkers.

Six months ago, could you have foreseen all that happening?

Moreover, many of these and other penny-stock winners are still extremely speculative. Sirius may still collapse under a capital-intensive business model. Vonage has quadrupled in the last week alone, perhaps thanks to news about Google (NASDAQ:GOOG) and its Google Voice application, but no one knows for sure what pushed shares higher -- or whether they'll stay there.

Recent gains have made penny stocks look tempting, but don't let their recent success fool you. Buying a penny stock is a gamble on a bounce-back that often never comes. If after extensive research, you're not convinced that the rewards are worth the risk, then you're better off steering clear.