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

Diana Shipping (NYS: DSX)

$9.22

****

(24%)

(11%)

5.1%

Paramount Gold & Silver (ASE: PZG)

$2.62

****

(35%)

NA

(19.5%)

Source: S&P Capital IQ, Yahoo! Finance; NA = not available.

These two 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 into the shallow end of the stock pool.

Sink or swim?
Just about everyone knows the glut of ships, lack of demand, falling rates, and an uncertain financial picture in Greece are why Diana Shipping and the rest of the shipping industry are low-priced. Just about every stock in the sector -- whether dry bulk or tanker -- carries a single-digit price.

Excel Maritime Carriers (NYS: EXM) , Navios Maritime, and Dryships all trade under $5 on the dry bulk side, while Frontline and Genco Shipping & Trading fetch $7 or less on the tanker side.

An argument could be made that at more than $9 a stub, Diana may look expensive by comparison. But with the shipper bouncing 40% off its lows (and up almost 25% so far in 2012), investors might want to consider whether it can go higher. The Baltic Dry Index, which recently hit 25-year lows, looks like it was at a rock-bottom valuation, as it has now rounded a corner. Excel Maritime recently improved and consolidated the time charter contracts for its fleet.

Yet with more ships still planning to hit the seas and many shippers quickly drawing down their cash, only the strong will survive. Diana, possessing rising cash balances and having seen its long-term debt peak, should be able to ride out the storm.

CAPS member neilepi sees the industry warming up again, joining the 2,464 CAPS members rating the dry bulk shipper to outperform the market indexes. Tell us on the Diana Shipping CAPS page or in the comments section below if you agree, then add it to your watchlist to see if this is just the calm before the storm.

Shining a light on growth
The news from Paramount Gold & Silver's San Miguel mine only gets better. Earlier this month it announced higher assay results from its Don Ese and La Union veins, while last week it said it found the highest silver grades yet at its San Antonio silver deposit. The Fool's gold and silver guru, Christopher Barker, says Paramount is sitting on the mother lode of value creation at San Miguel.

That would likely be enough to set it apart from other exploration stage miners, but its Sleeper gold project in Nevada is also returning better results from drilling in the waste dumps. Nearly three-quarters of the holes drilled returned intercepts with grades above 0.2 grams of gold per tonne, including 18 holes with significant intervals averaging more than 0.4 grams per tonne. That much gold and silver surprised even Paramount's management, which thought it would have reached the leach pads when the mine was owned by Amax Gold, now a unit of Kinross Gold (NYS: KGC) .

With Paramount's shares down 35% from a year ago, CAPS member arceneauxaustin looks at it as a chance to gain a foothold in a discounted growth opportunity. I've rated Paramount to outperform the broad indexes and also own shares of the miner on the basis it will be a big winner in time.

Tell us on the Paramount Gold & Silver CAPS page if you think this is its time to shine, and then put its stock on your watchlist to see if it can continue digging up good news.

Make some change
From tiny valuations big profits can emerge, but economic upheaval can cause things 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 contributorRich Dupreyowns shares of Paramount Gold and Silver, but he holds no other position in any company mentioned.Click hereto see his holdings and a short bio. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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