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 Silver Standard Resources (NASDAQ:SSRI).

Even the All-Stars in our 145,000-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, 56 stocks made the cut -- including our last topper, USEC.

My favorite penny stock this week is Melco Crown Entertainment (NASDAQ:MPEL), a gaming company whose operations are concentrated in Macau, and which first made an appearance in this column last September. Today's details:

By the numbers, there isn't much to like about Melco Crown. Revenue, though up 69% in the third quarter, failed to meet analyst estimates. The company also remains unprofitable: Melco lost $0.05 per American Depository Share (ADS) in Q3, and that was after positively adjusting for the effects of one-time items.

But not all Melco's numbers are bad. Debt is just 41% of total capital, well below the burdens carried by American peers Las Vegas Sands (NYSE:LVS), MGM Mirage (NYSE:MGM), and Wynn Resorts (NASDAQ:WYNN), all of which also compete in the Macau market.

Really, the bear thesis for Melco makes sense only if you believe there's a finite -- and well-defined -- market for gambling in Macau. I have a hard time believing that, and I'm not alone. The Motley Fool Global Gains team recommends shares of Melco precisely because Macau offers so much room for growth.

"If the economy is truly on the way back (I believe so) the influx of visitors will increase along with it," wrote CAPS investor mountain81 in June. "Macau has easy access to 1/3 of the world's population and a big chunk of them are heading to Macau instead of stagnant Las Vegas."

Do you agree? Would you buy Melco Crown 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.