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

Company

Recent Price

CAPS Stars (out of 5)

5-Year Return

Almost Family (NASDAQ:AFAM)

$31.89

*****

668.4%

Illumina (NASDAQ:ILMN)

$43.43

***

1,162.5%

True Religion (NASDAQ:TRLG)

$27.45

**

1,020.4%

Seabridge Gold (NYSE:SA)

$25.77

**

640.5%

PowerSecure International

$9.04

**

340.9%

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 KKR Financial.

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, 59 stocks made the cut -- including our last topper, Allis-Chalmers Energy.

My favorite penny stock this week is FelCor Lodging Trust (NYSE:FCH), a real estate investment trust that operates hotel properties on behalf of top brands. The details:

Metric

FelCor Lodging Trust

CAPS stars (out of 5)

*****

Total ratings

102

Percent bulls

90.2%

Percent bears

9.8%

Bullish pitches

9 out of 10

Data current as of Oct. 15.

I'll be honest: This is a scary bet. FelCor recently took on $636 million in new debt, which pays creditors 10% annually till maturity in 2014. That's not quite as usurious as the terms Sirius XM (NASDAQ:SIRI) accepted in a February deal with Liberty Media, but not cheap, either.

I still like the stock for three reasons:

  • The company manages properties for well-known hotel brands, including Hilton and Marriot International (NYSE:MAR).
  • The stock trades for little more than the tangible value of the assets it holds.
  • Insiders were buying shares in June, and in years past, they've bought other stakes at prices far higher than what we're seeing today. The last open-market sale of FelCor shares was in May 2007, at north of $25 per share. Currently, the stock trades for about $4.41 per share.

So I'm a buyer here, and I've rated the stock "outperform" in CAPS as a result. Do you agree? Would you buy FelCor Lodging Trust at today's prices? Let us know by signing up for CAPS today. It's 100% free to participate. Alternately, feel free to leave comments in the space below.

Each month, our Motley Fool Hidden Gems service spotlights promising micro-cap opportunities in a segment called Tiny Gems. Try this market-beating service risk-free for 30 days to find out what our penny-stock sleuths are following now. Almost Family is a Hidden Gems pick. Illumina is a Motley Fool Stock Advisor selection. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy was small and cuddly. Once.