Making Cents in Penny Stocks

The occasional shower of pennies from heaven might do our bank accounts some good, but we Fools can't say the same for penny stocks. The world of penny stocks is often full of manipulation and deceit, making it harder for investors to separate its few good offerings from the multitude best ignored. Though some investors think cheaper stocks have a greater chance to appreciate, those stocks may be cheap for a reason. Indeed, a $20 stock may have better chances of gaining value than a $0.20 one.

Still, many investors dabble at the low end of the stock-price spectrum. At Motley Fool CAPS, we award the "Pennies" title to investors who rate stocks trading in the single digits more than half the time. Believe it or not, you'll find some of the best CAPS All-Stars among those players.

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's the latest list of low-priced stocks with All-Star support:

Company	Price*	CAPS Rating (out of 5)	Player	Player Rating
Xinhua Finance Media (Nasdaq: XFML)	$2.70	**	goldminingXpert	99.90
Ford (NYSE: F)	$4.49	*	Tankota	99.48
Security Bank (Nasdaq: SBKC)	$5.86	*	chicachick	96.44
Washington Mutual (NYSE: WM)	$5.92	*	TheDeadCatBounce	92.25
BluePhoenix Solutions (Nasdaq: BPHX)	$6.50	*****	BicaChica	89.74

*Price when the outperform call was made.

As we delve into the low-priced "pennies," we find that most of the companies on this list are generally disliked -- the CAPS community has bestowed lowly one- and two-star ratings on them.

Buddy, can you spare a dime?
Is the budding capitalist undercurrent in China enough to support a financial media group like Xinhua Finance Media, let alone two? Xinhua has not fared well since its IPO, while rival China Finance Online (Nasdaq: JRJC) has had modest success. The latter has been able to monetize some of its customer base by getting them to subscribe to its financial offerings. In the meantime, Xinhua Finance has had to shuffle its executives around as it tries to refocus itself.

Investors, even those who are bullish about Xinhua Finance, are uncertain of its long-term prospects. For instance, CAPS player StormSurge says: "[This company] will benefit from the growth in the Chinese economy especially with the run-up to the Olympics. It's hard to tell how well this will do so I am only looking at it for the near-term."

In contrast, some of CAPS All-Stars find China Finance to be an incredible value at current prices. A month ago, TMFDitty saw a wide margin of safety for the media company, even if it takes five years to achieve one analyst's single-year expectation:

Based on the most recent results, I get ... a probable price-to-free cash flow ratio of 17. Now, no analysts are on record with 5-year predictions for growth. Really, there's just one guy out there... Take that analyst's prediction of $1.61 per share next year, but assume it takes not one, but five years for [China Finance] to get there. Want to guess what that works out to? That's right: 17% compound annual growth. Meaning [China Finance] is fairly priced (P/FCF/G = 1.0) if it takes five years to hit next year's target, or if it hits it, then flatlines for the next four years.

Make some change
What do you think? Should we fill up the change jar with these penny stocks, or ignore 'em like a discarded coin on the street? Consult our free Motley Fool CAPS investor-intelligence community, where your two cents count as much as anyone else's. There are already more than 110,000 investors in the community.

Copyright © 2008 Universal Press Syndicate.