Making Cents in Penny Stocks

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Low-priced stocks are often low-priced for a reason: They have significant problems to overcome. Yet those that have fixed their problems may be ready to take off to the next level.

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. This week we'll look at two low-priced investments the CAPS community has marked for future 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

Alcatel-Lucent (NYS: ALU) $4.69****(44%)15%28%
North American Palladium (ASE: PAL) $3.65****(39%)8%12.6%

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


These two companies may be low-priced, but that isn't necessarily enough to suggest they'll have an easier time recording big gains. We have to check and see what their catalysts for growth may be before diving into the shallow end of the stock pool.

Pinching pennies
The major telecoms are opening their purse strings again and planning to spend about 13% more in 2012 than they did last year. Sprint (NYS: S) plans on around $6 billion in capital expenditures this year to build out its Network Vision and add capacity for the iPhone -- somewhat less than Verizon's $8.6 billion and AT&T's $10.4 billion, but more than what analysts thought it would shell out. It's also considerably ahead of the $2.8 billion it spent last year.

While that leaves some analysts cautious about Sprint's precarious financial situation, it's good news for Alcatel-Lucent, one of the primary vendors for the telecom's new network. Using Alcatel's new lightRadio Wi-Fi gear, Sprint will be able to enable customers to seamlessly switch between cellular and Wi-Fi. Key is the equipment's new small footprint, which allows it to unobtrusively mount on the side of a building, pole, or rooftop and expand a carrier's network capacity in that area.

With its new technology and fledgling expansion, I'd have to agree with CAPS member Ronsevet that Alcatel is undervalued at this point.

Incredibly under priced, just finished their first profitable year [since 2005], amazing cutting edge technology just starting their way in the markets, only a matter of time before they boom, and that's without even bringing up their 4G deployment contracts world wide.

Tell us on the Alcatel-Lucent CAPS page or in the comments section below if you agree it's got the right technology, and then add it to your watchlist to see if it can make the connection without dropping the call.

Shining a light on growth
Because two-thirds of the world's demand for palladium is tied to the auto industry, the health of Ford (NYS: F) and GM, as well as car manufacturers in China and India, is of paramount importance. But with fears of China's economy slowing, palladium has lagged other precious metals so far this year. Despite sales' being down in the first two months of the year, some analysts think sales could double in China by 2018.

If true, that should push the price of palladium much higher than where it is now, because there's a supply shortage coming out of Russia, and analysts are bullish that that's exactly what will happen. As a result, count on North American Palladium and even Stillwater Mining (NYS: SWC) to benefit from those trends.

Shares of the miners are down 60% and 48%, respectively, from their highs, but analysts have different outlooks on their growth prospects. Where Stillwater is seen expanding its earnings at just 3% annually over the next five years, North American Palladium is expected to grow at 50% per annum!

That's just one of the reasons I made an outperform CAPSCall for the palladium miner, but you can tell me on the North American Palladium CAPS page if you agree with this assessment, and then put its stock on the Fool's free portfolio tracker to see if it will be able to drive higher still.

Make some change
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At the time this article was published Fool contributorRich Dupreyowns shares of North American Palladium, but he holds no other position in any company mentioned.Click hereto see his holdings and a short bio. The Motley Fool owns shares of Ford Motor.Motley Fool newsletter serviceshave recommended buying shares of Ford Motor.Motley Fool newsletter serviceshave recommended creating a synthetic long position in Ford Motor. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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