3 Alternatives to Penny Stocks

By Markets Fool.com

Penny stocks are a terrible investment. Unless you're actively looking to lose money, you should stay well away from a thinly traded, cheap stock sold on an over-the-counter exchange.

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With little regulatory oversight, fraud tends to run rampant. Despite the warnings of the SEC, shady promoters push firms of questionable value at an ever-increasing rate. Unfortunately, many well-meaning (but naive) investors continue to fall for their tricks, scooping up shares of likely worthless companies, only to be burned when the stock price inevitably plummets.

Penny stock promoters often lure in buyers with the promise of short-term riches: A relatively small investment can buy many shares in a company with apparently significant upside potential.

The Fool stands, categorically, against short-term investing, and those looking to get rich in the stock market overnight. If you're the sort of investor penny stocks appeal to, I would urge you to consider these alternatives instead. Admittedly, these companies aren't in the best shape -- they're beaten down, attempting turnarounds -- but you'd be buying shares of a legitimate enterprise with prospects for growth. And the share price won't drain your wallet; each trades for under $11 per share.

A beaten-down chip maker
AMD has been a fairly terrible investment for most of the last decade. Since the beginning of 2006, AMD shares have shed more than 90% of their value, and now trade for less than $3 per share. AMD's chief rival, Intel, and competitors using ARM-based processors, have steadily eroded its market share.

But despite several setbacks, AMD continues to push forward. In particular, the company is in the midst of a planned, multi-year turnaround, aimed at transitioning AMD's business away from the PC it has historically relied on. Management's goal is to get at least half of its revenue from markets other than the PC by the end of next year.

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AMD has scored some important wins in recent years, with both major game consoles and several of Apple's Mac models now using AMD chips. Unfortunately, Macs are low-volume and game consoles are low-margin, but management argues both could produce positive halo effects. There's also hope for AMD's future products:allegedlyleaked specs suggest that AMD's next-generation graphics processorcould be highly competitive.

Zynga still looking for a future after Facebook
Although Zynga was a pioneer in the free-to-play game space, the company has largely been unable to capitalize on the shift to mobile. For a time, its browser-based social games (such as FarmVille) were dominant on Facebook, but Zynga has not found much success on the app store. As its financials have languished, Zynga shares have tumbled, and currently trade for $2 and change.

Under the stewardship of Don Mattrick, the man who made the Xbox brand what it is today, the company is attempting a turnaround. Earlier this year, it acquired NaturalMotion, a developer of mobile games, and in April, released FarmVille 2 for mobile devices.

A year ago, only about 30% of Zynga's bookings -- what it actually sold in a given quarter -- were coming from mobile; last quarter, it was 55%. It's been a disappointing stock, but if Mattrick can continue to transform Zynga into a consistent creator of successful mobile games, Zynga could reward shareholders.

It lost the platform war, but BlackBerry could still win for investors
Trading around $10 per share, BlackBerry is the most expensive stock on this list. But like AMD and Zynga, it's a beaten-down stock attempting to bounce back. The demand for BlackBerry's smartphones certainly isn't what it once was. With its global smartphone market share in the low-single digits, the days of BlackBerry's dominance are over.

But that doesn't necessarily make BlackBerry a terrible investment. The company has a notable asset in the form of BlackBerry Messenger, and is attempting to cash in on the growing Internet of Things with an initiative called Project Ion. It's too early to say with any certainty, but in time, Project Ion could form the backbone of BlackBerry, serving as a way for businesses to draw data from a wide variety of Internet-connected devices.

In phones, too, there might be some hope. Its new, somewhat whacky, BlackBerry Passport is receiving some positive attention, and though it lacks many popular apps, the inclusion of Amazon's app store (a new development) gives BlackBerry's handsets far more than they once had.

BlackBerry's CEO, John Chen, is hoping to return to profitability in the near-future. If he can succeed, BlackBerry could reward shareholders.

Penny stocks are a bad idea, but stocks with low prices can make for solid investments if you pick the ones tied to companies on the way up.

The article 3 Alternatives to Penny Stocks originally appeared on Fool.com.

Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Apple. The Motley Fool owns shares of Amazon.com and Apple. 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.