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 giving investors 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 going to take a long time for housing to recover despite the rally in homebuilder stocks the other day after the news that new-home sales had dropped to a 40-year low. Couple that with the previous report that existing home sales also continued their freefall after the government stopped helping people buy houses, and it's looking very dreary indeed.

One reason for the rally might be that investors think housing really has hit bottom this time. No, really: This time it has. But there's still a huge overhang of inventory on the market, and the number of foreclosures keeps climbing. The market analysts at RealtyTrac say foreclosures rose 4% last month, the 17th straight month the numbers were up, and there's no end in sight until next year. All those homes will add to the overhang, and the distressed sales will push the price of housing down.

That's why investors have chased the yields offered by real estate investment trusts like Anworth Mortgage Asset, Annaly Capital (NYSE: NLY), and Chimera Investment (NYSE: CIM). These REITs invest primarily in agency-backed securities, investments primarily underwritten by the taxpayer through Fannie Mae, Freddie Mac, and Ginnie Mae. Anworth's portfolio is almost entirely made up of such securities.

After the federal government took over, Fannie and Freddie stopped backing the riskiest mortgages, focusing instead on higher-quality loans. When the housing market eventually turns, they should have a better product, which is why CAPS member iversonj88 is looking for opportunistic gains from Anworth.

Investors will want to snatch them up for growth and dividend value, plus there will be inflated gains over the next several years as these companies swoop in and get mortgages at fire sale prices.

A short circuit
If there's one think markets hate, it's uncertainty, and the regulatory questions surrounding how the federal government will change the landscape of for-profit secondary education providers Corinthian Colleges, Apollo Group (Nasdaq: APOL), and ITT Educational Services is causing investors to flee their stocks. Over the past year, Corinthian is down more than 70%, ITT Educational Services has lost half its value, and Apollo Group has lost one-third of its market cap.

Highly rated CAPS All-Star UltraLong, who has loathed the for-profit education sector for some time, thinks Corinithian is actually a good value right now despite a student loan investigation.

They have been profitable since 2001 and have grown revenues in nearly every year since then. They have effectively retired almost 4M outstanding shares since 2005 so they aren't diluting the hell out of shareholders. They are trading at just 0.6 times book value and roughly 4 times my 2011 earnings projections. Let them huff and puff over more stringent regulations for Corinthian, they'll still remain profitable. 

Tastes like chicken
Uncertainty is also gripping Syntroleum, which has a joint venture with Tyson Foods (NYSE: TSN) to produce a biodiesel fuel called Dynamic Fuels. It was predicated on a $1.00 per-gallon tax credit for renewable diesel and biodiesel. However, Congress allowed the tax credit to expire, and there's no certainty it will be resurrected. While there are potential global market opportunities for Syntroleum, the uncertainties about the venture have weighed down the stock because without the tax credit, the fuel produced would not be profitable.

CAPS member DCMonty25 has a number of reasons for thinking Syntroleum is still a good opportunity.

1. Geismar (La.) bio-synfining plant, which is part of Syntroleum's joint venture with Tyson Foods, is mechanically complete, and will be fully operational by Q3 2010. Once online it will produce up to 75 million gallons of summer-to-arctic-grade bio-diesel per year.

You can read the rest of the points made here.

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' counts as much as anyone else's.