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 for less than $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 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!

Company

Recent Price

CAPS Rating (out of 5)

Return on Capital

Huntsman (NYS: HUN) $9.43****7.2%
Manitowoc (NYS: MTW) $8.88****5.2%
Melco Crown Entertainment (NAS: MPEL) $8.43****4.5%

These three companies may be low-priced, but that isn't necessarily enough to suggest that 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.

Hiding in plain sight
Rising prices for titanium dioxide have pinched efforts by DuPont (NYS: DD) and Huntsman to widen profit margins even though they've so far been able to pass along many of the costs to their customers. Huntsman recently reported that revenues surged 24% from the year-ago period despite a decline in volumes. It said it expects its ore costs to double, and there's only so much the company can pass through.

That could spell trouble as well for paint makers like Benjamin Moore and Sherwin-Williams, which rely on TiO2 for their paint base. With rising raw-materials costs and a still-weak construction market, don't expect margin expansion any time soon.

Yet there was a major discovery recently in Paraguay, possibly as much as 21 billion metric tons, which could cause the price of titanium dioxide to tumble. That might not happen soon enough to contain costs now, but with demand heating up in emerging economies, the discovery couldn't have come at a better time. China's adjusting to new lending restrictions, and Thailand is digging its way out of the floods that ravaged the country, so Tronox sees demand softening for the next quarter or two before picking up again by February.

Of course, high prices have led to innovation, including the development of alternatives such as a polymer Dow Chemical (NYS: DOW) says will allow paint makers to cut their TiO2 consumption by 20%. Yet until their wider adoption, Huntsman should be able to ride the greater demand and higher prices to bigger gains.

More than 95% of the CAPS members rating Huntsman think the specialty chemicals maker has been unfairly beaten up by the market for its weak earnings reports (I'm one of them), but let us know in the comments section below or on the Huntsman CAPS page whether you think it will still be able to paint its profits black, and then add it to your watchlist to see whether it pulls it off.

Crane your neck
After bouncing higher following a better-than-expected quarterly earnings report, crane operator Manitowoc has given back some 15% of those gains as global financial fears grip the market again. If the bandage is about to be ripped off the wound of sovereign debt once more, the resulting chaos could depress markets further.

Manitowoc was able to overcome those concerns this time around, as did Caterpillar (NYS: CAT) and equipment maker Illinois Tool Works, but a prolonged period of disruption might thwart Manitowoc's ability to turn consistently profitable again. It's been running trailing losses for almost three straight years now, and it's heading into what has provef to be its weakest periods. Yet with its food-service division cooking up dependable profits, it may yet fool the analysts once again.

As CAPS member shake656 sees it:

MTW has been hurt by the recession, there are some concerns about the synergies between the Crane business and Foodservice business. These [businesses] are not even remotely related and there are some concerns weather management can run two very different [businesses] effectively. Also they have acquired a decent amount of debt. Once the economy recovers they should benefit as long as they spend their earnings reducing their long term debt.

Put Manitowoc on your watchlist, and let us know in the comments section below whether you think it will surprise Wall Street once again.

Double down
Macau casino gambling revenues hit a new record last month, rising 42% to $3.4 billion, with visits running 13% higher, but some analysts are worried that growth is slowing. With Las Vegas Sands (NYS: LVS) offering stiff competition, Melco Crown Entertainment is going to have to show investors it can do a better job of translating top-line growth into bottom-line results.

Revenues jumped 45% last quarter for the casino operator, as gambling revenues rose and resort rooms, food and drinks, and entertainment contributions improved. With Melco nearing the start phase of a new casino in Studio City, investors may be concerned that it won't be able to profitably run another operation, since its current business lags.

Yet despite the slack performance, the CAPS community is betting that with Macau as the only game in town, Melco will do well in the long run. More than 96% of the nearly 1,350 CAPS members rating the gaming hall think it will beat the Street going forward. Add Melco to the Fool's free portfolio tracker, and tell us on the Melco Crown Entertainment what you think the odds are it will hit a hot streak.

At the time this article was published Fool contributorRich Dupreyholds no position in any company mentioned. Check out hisholdings and a short bio.Motley Fool newsletter serviceshave recommended buying shares of Illinois Tool Works and Sherwin-Williams. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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

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