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
Analysts may view Intel's (Nasdaq: INTC) purchase of McAfee as a smooth way to get yet another competitive advantage over Advanced Micro Devices -- building security capabilities into its chips might offer an attractive package. But the chipmaker may have just weighed itself down by overpaying, much as AMD did for ATI.

It's going to take Intel time to digest an acquisition that big, and there's no guarantee the process will flow smoothly. Any bumps along the way could give AMD the chance to surpass Intel once again. Intel has already agreed to stop using its market heft to batter customers into forgoing using AMD's chips; the Fusion chip revolution is upon us; and there will always be the game of one-upmanship between the two companies' processors. AMD just might benefit most from Intel's desire to be all things to all people.

CAPS member NightShade00013 thinks AMD is ahead of the game here, having already burped out its ATI acquisition:

Everyone has a bump in the road to their goals, but with AMD's purchase of ATI and their ability to combine the work that Intel and Nvidia do separately under one roof and share that tech between the two lines they are bound to get a lot better. And one thing that everyone forgets is that AMD does more than CPU's they also do chipsets, motherboards, GPU's and Videocards in the main stream not to mention other chip manufacturing. 

However, Intel's decision to broaden its appeal might simply signal that it foresees widening weakness in the semiconductor sector. A new line of business might help smooth out any lumpiness in the chip market. That's got to be worrisome then for LSI, which already feels the hot breath of Intel, Texas Instruments (NYSE: TXN), and Marvell Technology (Nasdaq: MRVL) on the back of its neck.

Revenues in its most recent quarter missed analyst expectations and came in at the low end of its own guidance. LSI's customers are adjusting inventories after a bout of strong buying in the first quarter, causing the high-performance chipmaker to offer a cautious outlook going forward.

CAPS investor Skyshark29 still expects LSI to overcome these speedbumps:

Semiconductors are on the rise. Consumers may slow consumption, but technology growth and production is still in demand, in part to help provide solutions for economic inefficiencies.

A short circuit
The consolidation in the tech sector is similar to the one under way in telecom, which has provided Alcatel-Lucent with a platform to gain business. The apparent victory of long-term evolution (LTE) over WiMAX gives it and other network infrastructure providers like Ericcson and Nokia's (NYSE: NOK) joint venture with Siemens a means of attracting the billions of dollars flowing to the next-gen network.

Highly rated CAPS All-Star member leohaas has long been skeptical of Alcatel's ability to translate its opportunities into growth. However, the recent run-up in its share price as a result of its second-quarter earnings provided an excellent opportunity to presciently suggest that the company would fall once again.

Dial up the Alcatel-Lucent CAPS page and drop a dime on whether you think it's time to disconnect from the telecom equipment provider.

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.