Updated with Jan. 29 closing stock prices

By Jamie Dlugosch of Investor Place

In the aftermath of the bear market, there is no shortage of companies priced under $3 per share, but to successfully take advantage of the abundance of opportunities, you need to pick stocks based on the following criteria
  • Look for companies with market capitalizations that are less than $500 million. You want stocks trading on a U.S. exchange, not shell companies.
  • Find stocks with a reasonable business behind the stock.
  • From there, look at fundamental value combined with technical analysis. Volume is important, and you want to be buying on weakness and selling on strength. (See also: The 6 Rules of Penny Stock Trading.) Based on these criteria, then, here are five penny stocks that belong in any portfolio. Yes, there is a high degree of risk with these picks, but, so too, is the potential reward.

I'll start my list of Top 5 Penny Stock to Buy with a commodity play. A weak dollar and a strong economy suggest that oil prices will be going higher in the next year. The higher the price of oil, the more advantageous it is for the oil sands business.

Oilsands Quest ( BQI) shot up from August to October before subsiding to its previous level. While there is a high degree of risk with BQI (the company currently has no revenue), the value of its reserves and expected ability to extract such reserves on a profitable basis make this a reasonable speculation. And those expectations increase with higher oil prices. The potential reward could be in the form of a double in 2010. Shares closed down 4 cents to 83 cents.

Ever dream of owning a monopoly? You can with Sirius XM Radio ( SIRI).

> > Bull or Bear? Vote in Our Poll

After a brush with death at the end of 2008 and early 2009, the company obtained necessary funding needed to support the business during a brutal economy. Gone are the days of unnecessary spending due to competition with rival XM and in its place is a more friendly competitive landscape and ability to charge higher prices for its valuable services.With auto sales are recovering nicely and SIRI's product now available in almost every new vehicle on the market, subscriber growth returned in the fourth quarter of 2009. That should continue in 2010 -- and investors will be surprised by the earnings potential. This company will double from here in 2010. Shares of Sirius closed Friday at 84 cents, up 3 cents.

Denny's ( DENN) is primarily a stock picker's market at the moment after an impressive rise that lifted most boats in 2009. Going forward the best returns will come from owning small companies that can grow earnings quickly and yet trade for multiples of earnings that are below earnings growth rates. Denny's fits that bill perfectly.

According to one analyst, the company is expected to go from $0.25 per share in profits in 2009 to $0.34 in 2010. At its current price, investors can own that double-digit growth for less than 10 times expected earnings. Look for the company to follow its 2009 Super Bowl ad success with another big promotion for 2010. And a stronger consumer makes it likely that the company will indeed make $0.34 this year. If so, I expect DENN to approach my target of $11 within the next 12 months. Shares of Denny's closed at $2.42, up 9 cents.

The financial crisis has left many to scrounge for typical banking services like check cashing and wire transfers. Gladly filling the void are companies like MoneyGram International ( MGI).

Make no mistake, this is big business. American Express' recent purchase of Revolution Money, a primarily online payment services provider, is an indication that big players are going after the under banked or less affluent customer. As for MGI, the company had been a big star until stumbling badly in 2008. The issues that caused the problem appear to be behind the firm. The market it serves has only gotten larger since. Look for big things from MGI in 2010. My target for MGI is $10. Shares of Money Gram closed down 3 cents to $3.10.

Majesco Entertainment ( COOL)

The video game market offers tremendous growth possibilities, and software developers like Majesco Entertainment ( COOL) are producing titles to support this growing demand. Expectations are for a small profit in 2010, and shares trade for a paltry five times forward earnings estimates. As quarterly profits are recorded, shares should rise commensurately.

It should be noted that for Q4 2009, the company reported an operating loss of $5.5 million. The loss was mostly due to accelerating impairment charges. The company did show impressive gains in sales, but those sales came with lower profit margins. On the surface, it would appear that the poor performance was directly due to poor management. Managing inventories requires strong management. Clearly COOL's team dropped the ball here. Given that I expect inventories to be better-managed going forward, I am willing to cut management some slack here.

At the end of the day, the company is growing, and with that growth profits are likely to follow. The company has a strong balance sheet, and its titles are doing well. I still like the stock and expect shares to recover over the next two quarters. Shares of Majesco closed at 85 cents, up 9 cents.

Other features from Investor Place:

Five Reasons to Buy Pepsi Stock

One Pants Stock You Want to Get Into

Five Reasons Railroad Stocks Are Set to Surge

At the time of publication, the author was long Oilsands Quest, Money Gram, Sirius XM Radio, Denny's and Majesco Entertainment.

Jamie Dlugosch is the editor of Penny Stock Winners. He has over 20 years of experience in financial markets including investment banking, equity analysis and research and money management. In addition to being the Editor of Penny Stock Winners, he is also a Contributing Editor of InvestorPlace.com and founder and editor of The Rational Investor.

Please note that due to factors including low market capitalization and/or insufficient public float, TheStreet considers Moneygram, Majesco, Denny's and Oilsands Quest to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

Jamie Dlugosch is the editor of Penny Stock Winners. He has over 20 years of experience in financial markets including investment banking, equity analysis and research and money management. In addition to being the Editor of Penny Stock Winners, he is also a Contributing Editor of InvestorPlace.com and founder and editor of The Rational Investor.

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