Making Cents in Penny Stocks

Before you go, we thought you'd like these...
Before you go close icon

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 two 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)

1-Year Return

Est.
5-Year EPS Growth

Return on Capital

FormFactor (NAS: FORM) $5.20*****(45%)(8%)(9.8%)
GT Advanced Technologies (NAS: GTAT) $9.08****(18%)10%61.2%

Source: S&P Capital IQ, Yahoo! Finance.

The companies above 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.

Chipping away at the competition
It hasn't been a particularly encouraging time for the semiconductor industry, as chip maker Altera (NAS: ALTR) warned of a gloomy outlook, and analyst iSuppli forecast anemic revenue growth of just 3.3% for the industry in 2012. At least according to the naysayers, it might not be until next year after inventories have been winnowed that a recovery will be seen, although upbeat reports from Intel and Texas Instruments suggest otherwise.

The negative outlook likely played into FormFactor's weak fourth-quarter guidance this past December, when it said a poor pricing environment would cause revenue to fall to $28 million to $31 million, down from its prior forecasts of $30 million to $34 million. But Korean semi maker Hynix Semiconductor doesn't think it will take that long to rebound, hoping for DRAM prices to improve in the calendar year's second quarter and industry conditions to improve in the second half.

Weak demand is hurting FormFactor's sale of wafer probe cards regardless, and its shares have tumbled by more than half from their 52-week highs. Considering the amount of cash the tech specialist produces, CAPS member scottyjmp3 finds the price awfully cheap: "Trading at a market cap of $260, $40 million less than the amount of cash on the balance sheet."

Chip in on the FormFactor CAPS page or in the comments section below if you agree, then add it to your watchlist to see if its future is well-formed.

Can this stock shine?
Considering how bad things could have been, the results polysilicon equipment maker GT Advanced Technologies turned in showed remarkable resilience. Although headline numbers looked awful, with revenues down 42% year over year and profits plunging 76%, the company offered up hope that its underlying fundamentals remained intact.

I wonder if it's the calm before the deluge. Poly prices have plummeted because of a glut of the stuff on the market, and there's no let-up in sight. LDK Solar (NYS: LDK) , the world's second largest manufacturer of wafers, will be tripling its capacity when it brings a new polysilicon facility online by the end of 2013. It had to revise its margins forecast to -3% to 5% (from 11% to 16% previously), but remained determined to plow ahead with its plans.

And while GT's sapphire revenue for the LED industry nearly quadrupled to $31 million, there's been an oversupply in that market, too. Sapphire substrate maker Rubicon Technology (NAS: RBCN) has seen its shares lose 60% of their value as a result.

CAPS member usbodyguard believes an upgrade and replace cycle will come to GT's rescue: "Technological improvements will quickly improve efficiencies and the evolving technologies will require manufactures to keep pace by upgrading equipment."

Tell us on the GT Advanced Technologies CAPS page if you think the markets for these materials will reverse course, then put its stock on your watchlist to see if it can zero in on new growth.

Make some change
From tiny valuations big profits can emerge, but economic upheaval can cause it to change on a dime and create obstacles to retirement happiness. Read the Fool's latest special free report, where we reveal the shocking can't-miss truth about your retirement -- and what you can do about it. Grab a copy today and find out everything you need to know.

At the time this article was published Fool contributor Rich Duprey owns shares of Intel, but he holds no other position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of FormFactor, Texas Instruments, and Intel. Motley Fool newsletter services have recommended buying shares of Intel and FormFactor, as well as creating a bull call spread position in FormFactor. 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 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

Want more news like this?

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

From Our Partners