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


Recent Price

CAPS Stars
(out of 5)


Titanium Metals (NYSE:TIE)




ClickSoftware Technologies (NASDAQ:CKSW)








Allos Therapeutics (NASDAQ:ALTH)




Net Servicos de Comunicacao (NASDAQ:NETC)




Sources: Motley Fool CAPS, Yahoo! Finance. As of Nov. 6.

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 Ceradyne.

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, 51 stocks made the cut -- including our last topper, Sonus Networks.

My favorite penny stock this week is USEC (NYSE:USU), which sells enriched uranium to commercial nuclear power suppliers. The details:



CAPS stars (out of 5)


Total ratings


Percent Bulls


Percent Bears


Bullish pitches

245 out of 255

Data current as of Nov. 8.

If this call seems counterintuitive, it should. Last week, USEC reported a 47% year-over-year decline in uranium revenues during the third quarter. Any further downtrend would hurt the company.

Fortunately, there doesn't seem to be one. Spot prices rose in October, and uranium miner Cameco (NYSE:CCJ) recently told investors that it expects a 5%-10% increase in 2009 revenue. USEC, meanwhile, recently issued improved guidance; it now expects more than $350 million in operating cash flow this year.

But the big catalyst for USEC is anything but certain: a new $2 billion centrifuge, set to open next year and backed by federal loan guarantees. Or at least, that's how it was supposed to be: In August, the Department of Energy (DOE) backed away from its earlier commitment.

USEC has since taken measures to control costs. According to management, it's exploring "strategic alternatives" such as a company sale. "It is our plan to present a revised and improved financial structure as part of our updated submission to DOE," said CEO John Welch in a recent press release.

What would the company sell for? That's an open question, but USEC's tangible book value is about $1.18 billion as of Sept. 30. The stock trades for less than $1 billion in enterprise value as of this writing. That strikes me as an unreasonable value gap, which should close with any good news from the DOE.

Do you agree? Would you buy USEC at today's prices? Let us know by signing up for CAPS today. It's 100% free to participate. Alternatively, feel free to leave comments in the space below.