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 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-Yr. EPS Growth

Return on Capital

Chimera Investment (NYS: CIM)

$2.95

****

(18%)

2%

N/A

General Moly (ASE: GMO)

$3.53

****

(35%)

N/A

(3.4%)

Sources: S&P Capital IQ, Yahoo! Finance; N/A = not available.

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 in to the shallow end of the stock pool.

Look out for falling dividends
Let's call it the Great Dividend Contraction. Real estate investment trusts, long desired because of their fat and juicy payouts, have suddenly been hacking away at their dividends to conserve cash. Mortgage REITs like Capstead Mortgage and American Capital Agency (NAS: AGNC) slashed their payments recently, joining Chimera Investment, Annaly Capital Management, and Hatteras Financial in reducing their dividends.

Yet since their announcements, many REITs have seen their stocks rally. Chimera's stock is up 11% since its Dec. 19 news (and was up 19% at one point), while Hatteras is up 8%. In the week since American Capital announced its cut, its shares are 4% higher.

That suggests the market was already factoring in a lower dividend beforehand. Yet even with the new, lower dividend, Chimera is still yielding 14.7%.

CAPS member khagan1227 sees this confluence of events keeping Chimera an attractive investment.

Based on the low stock price, the Fed's promise to keep interest rates at historic lows and it's double digit dividends, it makes Chimera a good stock for a mid term keeper.

Tell us on the Chimera CAPS page or in the comments section below if you agree, then add it to your watchlist to see if there are additional dividend cuts in its future.

Mining growth
It should all be a go for molybdenum miner General Moly as soon as the Bureau of Land Management issues the appropriate permits for its Mt. Hope project in Nevada. The state has stepped up and issued the miner the necessary water permits as well as approving the company's 3M plan -- monitoring, management, and mitigation. Now everyone is sitting around twiddling their thumbs waiting for the feds to move off the dime.

General Moly has financing lined up, and Korean steelmaker POSCO (NYS: PKX) is an investor in the project. They've been expecting approval since the third quarter but continue to push back the timeline as BLM drags its feet.

I rated General Moly to underperform the market over a year ago when it was swept up in the rare earth mineral mania. And while that pick netted me some good gains on CAPS, now is the time to close out that pick and say the miner should outperform in the future as there seems little to suggest it won't be approved to move forward.

With 98% of the 125 CAPS All-Stars also rating the miner to beat the Street going forward, I'll be in good company. Tell us on the General Moly CAPS page if you think this is its time to shine, then put its stock on your watchlist to see if it can zero in on a new growth phase.

Make some change
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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 Chimera Investment and Annaly Capital. Motley Fool newsletter services have recommended buying shares of Annaly Capital. 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.

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