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.

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 are three low-priced stocks enjoying All-Star support:

^Price when the outperform call was made.

The above three companies may be low-priced, but that isn't necessarily enough to suggest they'll have an easier time recording big gains. Low-priced stocks are often low-priced for a reason. We have to check and see what their catalysts for growth might be before diving in to the shallow end of the stock pool.

Your two cents' worth
It's hard having to hope for rack and ruin to boost your company's fortunes, but that's the situation oil refiners like Western Refining find themselves in.

The economy is too slack, unemployment is too high, and demand is not strong enough to drive profits higher for refiners. Valero (NYSE: VLO), the country's biggest refiner by capacity, expects to be profitable for the year, but it's primarily a result of the slash-and-burn tactics it has used on operations.

Despite selling off refineries, as both Valero and Sunoco have done in an effort to boost profitability elsewhere, the problem arises when you've hacked away as much excess as you can. What do you have left? Pray for rain; lots of it, in the form of hurricanes.

Highly rated CAPS All-Star Beorn10 is counting on a busy hurricane season to help bolster efforts at Western Refining:

A speculative bet that the hurricane season will limit refinery capacity enough to give the remaining functioning refiners some pricing power to raise their profits. The location of WNR's refineries are relatively safe and none are in the gulf area.

Beorn10's hope is not misplaced. Analysts also suggest an outbreak of hurricanes is about the best hope refiners have right now for a spike. Otherwise, they see pricing -- and profits -- falling to new depths.

A short circuit
It's been rack and ruin for Synovus Financial, whose exposure to the southeastern United States caused it to lose almost $1.5 billion last year. Florida, Georgia, and South Carolina haven't exactly fared well during the recession, and the Gulf oil disaster creates a wild card in how badly the economies in the region will be affected. Yet Synovus is the sixth-largest bank in the region by customer deposits, which should help it hang on until relief arrives.

How so? The federal government is likely to pour billions into the oil-affected region in an effort to prop up local economies. But until the leak is really contained, Synovus will have to hang on as best it can through the reorganization efforts it began earlier.

The housing market's continued decline got Synovus, Regions Financial (NYSE: RF), and SunTrust Banks (NYSE: STI) into their current predicament, but it's also created real bargains. The more financially sound banks will be able to reap rewards down the road. CAPS member ww2004 doesn't like Synovus' exposure to the Florida real estate market, but 84% of the CAPS members rating the regional bank think it will outperform the broad market averages.

Lack of communication
Level 3 Communications is finding the fiber-optic communications network market a bit crowded, and some analysts think pricing pressures will get the better of it. That same logic sent Neutral Tandem (Nasdaq: TNDM) lower earlier this year, but also has it bumping up against Akamai Technologies and Limelight. With its low stock price, CAPS member philnj might not be so far off the grid in expecting Level 3 to be acquired at some point.

What's your view? Does Level 3's situation amount to it dropping to DEFCON 4, or is there a way out? Let us know on the Level 3 Communications CAPS page.

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.