The Next Million-Dollar Penny Stock

Penny stocks can make you rich. Need proof? Every one of these multibaggers was once a penny stock:

Sources: Motley Fool CAPS, Yahoo! Finance.

The promise of outrageous returns has periodically made even the world's best stock pickers penny stock investors. Peter Lynch has enjoyed the stock market's super-cheap seats in the past, and still does on occasion. The Royce Low-Priced Stock fund has beaten the market for a decade by betting on stocks trading near or below $10 a share, including American Eagle Outfitters (NYSE:AEO).

Even the All-Stars in our 140,000-plus Motley Fool CAPS community take to penny stocks. More than a few have been richly rewarded.

Pennies from heaven
So why not invest in penny stocks? Well, the warning the SEC issued about them provides one excellent reason to steer clear. But what if we take the agency's definition literally, and limit our choices to stocks trading between $1.50 and $5 a share? And what if we further seek only four- and five-star stocks with a market cap between $250 million and $2 billion? Surely our CAPS screener would return some winners, right?

This week when I ran that screen, 58 stocks made the cut -- including our last topper, E*TRADE Financial.

My favorite penny stock this week is Allis-Chalmers Energy (NYSE:ALY), a supplier of equipment and services to oil and natural gas explorers. The details:

Data current as of Oct. 8.

This isn't an easy call. Energy prices have yet to recover; natural gas hit a 7-1/2 year low in September. Analysts are expecting mostly poor results from domestic oilfield services vendors, and that includes Allis-Chalmers, which has many clients positioned in and around the Gulf of Mexico.

 But the domestic downturn won't last forever, and that's an opportunity for investors, wrote CAPS All-Star Teacherman1 a couple of months ago:

Good company pelted by a weak economy. Look at the oil futures; they are just an indication of what will be happening when the tide finally turns. Take a look at Lime Rock (the company which backstopped their share offering) and you will see that they are not in the habit of backing losers. It will take some time, but this will pay off big in the long run. ... A good play for the patient investor who doesn't panic on the market fluctuations.

Do you agree? Would you buy Allis-Chalmers Energy at today's prices? Let us know by signing up for CAPS today. It's 100% free to participate.

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