Here at the Fool, we don't tend to put much trust in penny stocks. A tiny share price may sound inviting -- even safe -- but it actually leaves the stock open to increased volatility and more risk.

Moreover, penny stocks often go hand in hand with microscopic market caps, a condition that comes with its own set of risks, rewards, and complications. All told, a well-designed campaign of spam emails and/or fanatical message-board postings could pump a hapless penny stock to high heavens -- and then leave it to implode again. Who's left bleeding cash in the ruins of schemes like that? Individual investors who took a flyer on a rumor or a whim.

Rules are made to be broken!
That being said, low share prices are not necessarily a death sentence. Some small-cap, low-priced stocks belong to well-run businesses that have fallen on hard times for some reason. There are many decent companies in this category, and some that are truly excellent. When their temporary hardship passes, the true survivors should be poised for massive gains, starting from rock-bottom prices.

So why not ask your fellow investors for some help? Using our CAPS screener, you can pinpoint stocks with low, low prices yet reasonable market caps that have impressed our CAPS members through good times and bad.

If you're playing along at home, here's how to duplicate my results before fine-tuning the screen to suit your own preferences:

  • Demand a market cap of at least $500 million, to weed out the worst of the easily manipulated stocks.
  • Ask for a share price below $5, which happens to be the cutoff point where the Nasdaq and New York Stock Exchange start sending letters to a company's management.
  • Make sure that the stock is rated at least four CAPS stars out of five today -- and that it was just as respectable six months ago.

Using these criteria, I get a short list of 27 results. Here's the cream of that crop:

Company

Current Share Price

Current Market Cap

Mahindra Satyam (NYSE: SAY)

$4.95

$3.3 billion

Allied Irish Banks (NYSE: AIB)

$2.50

$1,1 billion

Taseko Mines (AMEX: TGB)

$4.21

$784 million

Mueller Water Products (NYSE: MWA)

$3.15

$487 million

Himax Technologies (Nasdaq: HIMX)

$2.85

$507 million

Source: Yahoo! Finance.

This is not a list of outright recommendations. Screening is useful for stripping the market down from thousands of stocks that may or may not appeal to your investing sensibilities and creating a short list of research-worthy starting points.

Examples
I'm no expert on Irish banks, water treatment plants, or mining operations -- but you have to think that something good is going on when 97% of more than 1,700 CAPS investors believe that a stock will outperform the market. So, here's what some of your fellow investors are saying:

  • Allied Irish Banks sure gets some support from All-Star CAPS member tobyg74: "Love it, love it, LOVE IT!!! Being the contrarian that I am I can't buy enough shares of this bad boy. Government supported, this bank will coming out smelling like a rose when everyone stops panicking."
  • Taseko is "at least a 2-bagger" before the end of 2010, according to All-Star baseballdude. Why? Because the market is overreacting to delayed mine licenses, which turns a slight delay into a perceived long-term problem.
  • What's wrong with Mueller? The company recently lowered guidance for the year and then got hit with multiple analyst downgrades. CAPS player osho2025 sees "long term great opportunities ahead" but only after a few lean months. "This could fall another 25% by Feb 2011 if economy continues to fire blanks."

The company formerly known as Satyam Computer Services is more in my wheelhouse. This IT consulting firm used to run with the big dogs – International Business Machines (NYSE: IBM) and Infosys Technologies (Nasdaq: INFY), for starters -- until an accounting scandal cut the legs out from under the stock. In early 2009, Satyam would have failed my four-star respect test while totally acing the low-price requirement.

The company is clawing its way back to respectability, and Indian telecom software specialist Tech Mahindra may be just the sugar daddy Satyam needs to clear its tarnished name. Just be aware that you're rolling the dice a bit here; Satyam hasn't submitted quarterly reports to the Securities and Exchange Commission since that darn scandal.

What's next?
Blue-chip penny stocks do exist if you look hard enough. Once you locate the right ones, their depressed share prices give you the perfect launching pad for huge profits. It's not an easy game to play, and nobody can guarantee your success. But as long as you pick your poison carefully, the gains should outweigh the risks with market-beating results. And if you would like even more guidance in the rocky waters of small-cap investing, the Motley Fool Hidden Gems team is here to help. A 30-day trial pass is 100% risk-free and won't cost you a penny.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. Mueller Water Products is a Motley Fool Hidden Gems selection. Try any of our Foolish newsletters today, free for 30 days. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.