Making Cents in Penny Stocks

The occasional shower of pennies from heaven might do our bank accounts some good. Alas, Fools can't say the same for penny stocks. The world of penny stocks is often full of manipulation and deceit, making it harder for investors to separate its few good offerings from the multitude best ignored.

Still, many investors dabble at the low end of the stock-price spectrum. At Motley Fool CAPS, we award the "Pennies" title to investors who rate stocks trading in the single digits more than half the time. Believe it or not, you'll find some of the best CAPS All-Stars among those members.

Pinching pennies
This week, we'll look at some of the low-priced investments these All-Stars have praised. If the best investors regularly scanning this end of the market have singled out these companies, we might want to turn our umbrellas upside-down -- or run for cover!

Here's the latest list of low-priced stocks with All-Star support:

Price when the outperform call was made.

Your two cents' worth
That's exactly how much per share E*TRADE Financial lost last quarter. And while the company didn't post a profit like rivals TD AMERITRADE (Nasdaq: AMTD) or Interactive Brokers (Nasdaq: IBKR), that small loss was still a sweet surprise for the discount broker, which has followed a long, tortuous path to recovery. Its banking arm showed marked improvement with lower loan loss provisions; perhaps now, it can shelve all speculation that it might hook up with a partner.

CAPS member KhowstBowl sees E*TRADE's return to its fundamentals under new leadership as the company's best hope to grow a sustainable profit:

The company is making good on their previous bad debt & raising capital while their quality customer base grows. They're also getting back to basics with their brokerage arm & focusing on technology-which is what made [E*TRADE] a market leader to begin with. [E*TRADE] is a risk, but in my view worth it.

A coin toss?
Palm looks like the mirror image of E*TRADE. It, too, has a new executive on board to right a listing ship, and there's even merger chatter to raise investors' hopes. But rather than offering up a pleasant surprise as E*TRADE did, the smartphone maker walloped the Street with the ugly stick, announcing that it expected first-quarter revenue of only $150 million. That's half of what analysts were expecting.

Some smart Fools suggest that this is the beginning of the end for Palm, but my colleague Rick Munarriz suggests Microsoft and Nokia (NYSE: NOK) would buy it before that happened. But according to a Reuters analysis last week, Chinese computer maker Lenovo seems like the best fit. That might not be as good a choice as it sounds, since Lenovo has an Android-based phone it just launched in China. Why would it go with a company with dwindling market share, when Google's (Nasdaq: GOOG) Android platform looks like it will be a runaway winner on its own?

Fellow Fool Anders Bylund suggests Palm's value is in the brand name. CAPS All-Star TSIF says a buyout is the only hope he sees. But the current situation doesn't hold out much hope for a big payday for anyone, which might explain why more than half of CAPS members who've rated the one-time industry leader expect it to underperform the market.

An array of opportunities
While we're waiting for medical device maker Sequenom to sort out the troubles of its Down syndrome test, let's enjoy the potential its MassArray technology holds. Two months ago, Sequenom launched a test using its proprietary MassArray technology to determine the sex of a fetus -- a test that was met with a resounding huzzah. Now it's out with a new version of the system, offering even faster results than previous iterations. Sequenom can use that advantage as a lever to gain an even larger portion of the molecular diagnostic testing market.

CAPS member AlphaG3N3R4L isn't convinced by the technology's limited market:

If anyone has ever worked in a biotech lab, they would know that using MALDI mass spec. to analyze DNA is not a giant leap compared to current technologies. The only places to likely use the technology is a handful of academic labs and that's all. So how does that support the valuation then? Beats me.

Penny for your thoughts
Should we fill up the change jar with these penny stocks, or ignore 'em like a discarded coin on the street? It pays to start your own research on these stocks on Motley Fool CAPS. Read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made, all from a stock's CAPS page. Consult our free CAPS investor-intelligence community, where your two cents count as much as anyone else's.