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. They're often subject to manipulation and deceit, making it harder for investors to separate the few good offerings from the multitude best ignored.

Still, many investors enjoy dabbling at the low end of the stock-price spectrum. At Motley Fool CAPS, a "penny stock" is any stock trading under $10, and you'll find some of the best CAPS All-Stars regularly seeking out winning investments there. We identify them with a penny icon.

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!

Pinching pennies
Here are three low-priced stocks enjoying All-Star support:

*Price when the outperform call was made.

Your two cents worth
Had you taken insomnia drug Silenor to stay asleep for the past few months, you wouldn't have missed a thing. In early March, Somaxon Pharmaceuticals overcame two previous rejections of its sleep aid to finally win marketing approval. The stock, which had already been on a run since its December lows, more than doubled overnight when the FDA news broke. Since then, the stock has been steadily declining to the point where it sits at just about the same price it was at prior to the development.

Perhaps the problem lays in the market potential. While the American Psychiatric Association says some 70 million adult Americans are afflicted by insomnia, it's not exactly an ignored niche. Sanofi-aventis (NYSE: SNY) markets Ambien; King Pharmaceuticals (NYSE: KG) is out with Sonata; Sepracor has Lunesta; Japanese pharma Takeda manufactures Rozerem; and Merck (NYSE: MRK) is developing its own pharmaceutical sleep aid. Let's not forget the benefits of a glass of warm milk before bed, too.

Admittedly, Silenor tackles insomnia from a slightly different angle. It's not so much to put you to sleep as to keep you there. Still, will Somaxon be able to differentiate its drug enough from those of its competitors, even with a window of exclusivity available to it? Investors are increasingly beginning to think not. As its CAPS rating drops again, members may come to think Silenor is a hole in your bed you pour money into.

It's always possible there will emerge enough of a market to encourage some other pharmaceutical to make an offer on Somaxon, but until revenues start hitting the financial statement, this might cause a few nights of sleeplessness. Yet more than 86% of CAPS members rating the biotech indicate they think it will outperform the broad market averages.

Don't toss and turn about how you feel on the stock, head over to Somaxon Pharmaceutical's CAPS page and tuck in your opinion.

A short circuit
MannKind finds itself in a somewhat similar position as Somaxon. It's tackling a niche from a different angle, and although there's a big market opportunity, MannKind has to overcome a crowded field of failed attempts. And while its inhaled insulin therapy Afrezza offers an improvement over traditional needle-stick insulin delivery systems, the FDA has raised concerns about the drug and requested more information.

MannKind met with the agency earlier this month and recently reported Afrezza is at least no worse off than Eli Lilly's (NYSE: LLY) Humalog. Its stock shot up on what was essentially non-news.

All-Star CAPS member and biotech guru zzlangerhans isn't hopeful, seeing instead a future of delays and debt:

As predicted, Mannkind has suffered the back of the FDA's hand on the Afrezza NDA and is now sinking deeper into debt as they desperately line up their resubmission. So where will the share price move next? My guess is up. ... Expect a Kool-Aid bong hit and a move back into the 8's or above. After that? Probably an advisory panel meeting to be scheduled to judge the "clinical utility" of Afrezza. More delays and more debt.

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.