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 three low-priced investments the CAPS community has singled out as having 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 Equity

Alcoa (NYS: AA) $9.12****6.5%
Clean Energy Fuels (NAS: CLNE) $9.87****(1.0%)
E*TRADE Financial (NAS: ETFC) $8.42****1.7%

Source: Motley Fool CAPS, Capital IQ.

The three companies in our chart 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.

This ain't heavy metal
Despite the world being awash in aluminum as Alcoa and other aluminum producers churn out more metal, there remains a relative shortage for commercial consumers.

A closer look finds Goldman Sachs (NYS: GS) controversially part of the root cause. Not only does the investment banker trade the commodity, it also owns vast aluminum warehousing facilities that profit from limiting its release into the market. Although financing deals lock up some 70% of the inventory, Goldman earns a premium to the aluminum's market price, a premium that in the U.S. has risen 50% over the last year. As fellow Fool Alex Planes points out, major producers like Alcoa make out well under the arrangement.

Highly rated CAPS All-Star edwjm sees Alcoa's price as cheap on a number of valuation metrics, and with the London Mercantile Exchange working on a fix to the backlog issue, the shortage may not be so acute, though economic uncertainty may not do much to prop up prices.

Add Alcoa to the Fool's free portfolio tracker to see what happens next in the Goldman saga.

Cloudy days
It's hard to deny that solar power is on the ropes these days, even if the high-profile blowup of panel shop Solyndra hadn't occurred. First Solar (NAS: FSLR) and Suntech Power (NYS: STP) are providing all the confirmation needed that solar has some very cloudy days ahead of it.

That gives hope to natural gas enthusiasts, since its proliferation is a far more viable solution. Although a fossil fuel, natural-gas-powered vehicles can help break the lock oil has on our automotive market. North American production of natural gas is plentiful, keeping prices low. Clean Energy Fuels is tapping the need and opportunity by building out refueling stations across the country, many for businesses that are adopting CNG vehicles in their fleet. It already fuels more than 23,300 vehicles at 248 locations across the U.S. and Canada.

CAPS member NeuroStudent appreciates that Clean Energy Fuels bolsters a market that is primarily domestic: "Natural gas is clean, renewable, and produces less carbon emmissions than coal or diseal. A bonus - there is lots here in N America - no more reliance on foreign oil!!!"

Let us know on the Clean Energy Fuels CAPS page if you think there's enough support to win over the broader market, and add the stock to your watchlist to see how well it succeeds.

Underwater no more
The bad memory of its foray into the mortgage market hasn't quite receded, but E*TRADE Financial has returned to profitability this year after spending years wandering in the wilderness of billion-dollar losses.

In response to rumblings from E*TRADE's largest shareholder, hedge fund investor Citadel, the financial firm is exploring strategic alternatives, including putting itself up for sale. TD AMERITRADE (NAS: AMTD) and Charles Schwab make obvious suitors, but those legacy mortgages that still reside on its balance sheet -- even if at lower loss levels -- make any agreement complicated.

E*TRADE wants to be your financial advisor again, and is planning to expand its business over the next few years. CAPS member BrightEyed thinks it's a viable plan, considering it has managed to, well, manage the worst parts of its business:

Trading volumes have skyrocketed in conjunction with recent market volatility. Mortgage liabilities are being managed. Firm is a good buy out candidate in the near to medium term.

Add the stock to the Fool's free portfolio tracker and follow along on its progress. Let us know in the comments section below whether you agree the only hope this business has is for someone to buy it out.

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 Fool contributor Rich Duprey holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of First Solar. Motley Fool newsletter services have recommended buying shares of First Solar and Charles Schwab. 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.

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

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