Making Cents in Penny Stocks

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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 the CAPS community has singled out as those with the best chances of success by bestowing four- and five-star ratings on them. We just might want to turn our umbrellas upside-down to catch them!

Here are three low-priced stocks enjoying high CAPS support:

Company

Recent Price

CAPS Rating (out of 5 max)

Return on Capital

Kodiak Oil & Gas (NYS: KOG)

$6.81

****

(3.1%)

Power-One (NAS: PWER)

$7.03

****

67.1%

RF Micro Devices (NAS: RFMD)

$6.45

****

8.4%

Source: Motley Fool CAPS; CapitalIQ, a division of Standard & Poor's

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 into the shallow end of the stock pool.

Your two-cents' worth
Investors pretty much had to expect Kodiak Oil & Gas to tap the public markets with a share offering to raise some cash. They shouldn't have been all that disappointed, at least not as much as they were by its revised production schedule.

Like Continental Resources and Brigham Exploration (NYS: BEXP) , Kodiak's drilling program is aimed at targeting the Bakken reserves in North Dakota, which holds up to 4.3 billion barrels of recoverable oil. Expansion plans were accelerating, and an acquisition made it seem to suggest those preparations were coming to fruition. However, Kodiak reported a rough winter, combined with flooding throughout the spring, which caused a setback in its drilling. It ended up lowering its estimates on production for the year as a result.

Although Kodiak's financial position is not untenable, the reduced production and its cash requirements necessitated that it tap the public markets. Offering 20 million shares for sale, the oil and gas producer is planning to use the proceeds to pay down its debt and fund its drilling program.

They're not making any more land, and CAPS member mikekruk says Kodiak's holdings in the Bakken are a rich vein to tap.

High risk, high reward play on the Bakken. Owns 70,000 net acres, and assuming a value of $20k per acre, the value of the land exceeds their market cap.

Add Kodiak to the Fool's free portfolio tracker then head over to the Kodiak Oil & Gas CAPS page and drill down for additional insights.

Blackout
There's been a power outage in the inverter market as Power-One and Satcon Technology outdo each other in the race to the bottom. The solar market is reeling from slack demand, and that is short-circuiting results for inverter makers.

Satcon recently lowered revenue and margin guidance for the second quarter, and with Power-One scheduled to report results tomorrow, there's hardly a reason to think it's going to do any better. SunPower (NAS: SPWRA) just said not to expect its second quarter to shine very brightly while Canadian Solar says margins are going to be weak. Oh, and its CFO up and quit.

Not many people were expecting the second quarter to be a good one for the industry anyway, so a lot of this might be "big bath" accounting. The industry is taking as many hits as it can to get rid of all the bad stuff now to make results look better later. But, there might be some hope that even if European demand is weak, U.S. demand could pick up some of the slack, and Power-One, which has been nearly cut in half from its highs, will end up surprising the market later on.

CAPS member vaderblue likes the fact that even though it's facing difficult times, Power-One continues to invest in R&D spending.

i like this one because they seem to be pushing R&D and their revenues. They are focused on a high gross profit and from their return on equity of 76%, they are doing every thing right. Get on this one for they have the cash as well.

Add Power-One to your watchlist to see if it can invert its declining stock price.

A chip off the old block
Profits fell sharply for chipmaker RF Micro Devices, but because the fall was better than anticipated, the market gave it the benefit of the doubt and boosted the stock slightly. The lift was likely due to adjustment for one-time impacts; profits were about level with last quarter, though still down significantly from the year ago period.

Demand for smartphones continues to be the driver for RF's growth, as well as at peers Triquint Semiconductor (NAS: TQNT) and Skyworks Solutions (NAS: SWKS) . The latter not only handily beat expectations, but said that when you add tablets into the mix, the fourth quarter was looking even better.

With 98% of the CAPS All-Stars rating RF Micro to beat the Street, but you can track of what management is up to by adding the stock to the Fool's free portfolio tracker and following along on its progress.

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? Consult our free, CAPS-investor, intelligence community, where your two cents count as much as anyone else's.

At the time this article was published The Motley Fool owns shares of Power-One and TriQuint Semiconductor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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