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

Return on Capital

Primo Water (NAS: PRMW) $6.22****(4.1%)
SandRidge Energy (NYS: SD) $6.87****(1.9%)
Zoltek (NAS: ZOLT) $7.41****(1.6%)

Source: Motley Fool CAPS; Capital IQ, 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 see what their catalysts for growth might be before diving into the shallow end of the stock pool.

Jumping into the water
It would seem the biggest question mark surrounding Primo Water is how much consumers are going to like lugging home multigallon containers of bottled water from the store. Unlike Poland Spring that delivers water to your door, you have to go to Wal-Mart, Lowe's, or some other mass merchandiser to pick up a jug of Primo.

I've noted previously the Primo exchange stations are modeled after the Blue Rhino propane gas model, a not-surprising fact considering the founder of both is the same person. But propane can last you an entire summer's worth of barbecues; water, you might have to stock up on weekly.

Whether that's what accounts for missing sales and profit numbers isn't known right now, but revenue was up almost 70% last quarter from the year-ago period, though much of that was a result of adding new outlets. Same-store sales, where retailers have had water bottles on their shelves for at least a year, increased only 2.5%. Maybe that's why it's already branching out into the DIY soda market as well as bagged ice, a market currently led by Reddy Ice.

CAPS member eauxboy finds a market primed for tapping and says Primo's "razor and blades" model is a proven winner.

The management is experienced; the market for water and beverages is booming; they have virtually no debt; they solve the "green" problem by recycling the water bottles for the customer; they provide a good value (low cost per gallon); and they sell their own coolers to build their business (razor/razorblades).

Add Primo to the Fool's free portfolio tracker to see if progress is a slow drip or like drinking from a fire hose.

Ramping up the energy
Apparently SandRidge Energy has taken its cue from the federal government and is determined to spend beyond its means. Last month, it posted pretty good earnings numbers, although adjusted earnings still came up short of expectations. Management laid out a capital spending program that seems to defy its ability to pay for it.

It's going to double its rig count in Oklahoma and Kansas and is raising its capital expenditure plan this year to $1.8 billion followed by a similar amount next year. But it has just $4.6 million in cash on its balance sheet against almost $2.9 billion in debt. Yeah, investors hope management is successful in making its capital program self-funding.

Right now it has resorted to selling off natural gas assets. The SandRidge Permian Trust recently IPO'd, and Sandridge is looking to sell off other assets it has that might bring in some cash to pay for all this spending.

SandRidge management is neglecting to look after what it has now while looking out ahead for the new thing.

Let us know on the SandRidge CAPS page if you agree with management's apparent position of "you gotta spend money to make money."

Red, the new green
The potential for "green jobs" is looking very bleak. Even beyond the high-profile failure of the administration's poster child solar shop Solyndra, there's a widening river of red ink elsewhere. Carbon fiber maker Zoltek saw operating losses widen as orders from major customer Vestas slid 40%, similar to the carnage wrought when Sinovel stopped taking orders from its supplier American Superconductor (NAS: AMSC) .

With power inverter makers SatCon Technology and Power-One (NAS: PWER) also having the wind stripped from their sails earlier this year, the wind power industry is in the doldrums. Solar's no picnic either, and with a government unable to afford rich subsidies, the future's not looking so bright for green energy.

With 95% of the CAPS members rating Zoltek to outperform the broad market averages, it's apparent they believe it will be able to find the trade winds again. Zoltek says its higher inventory levels, for example, are there to meet expected future demand. Add the stock to the Fool's free portfolio tracker and follow 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 Wal-Mart Stores and Power-One. Motley Fool newsletter services have recommended buying shares of Lowe's and Wal-Mart, as well as writing covered calls on Lowe's and creating a diagonal call position on Wal-Mart. 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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