One of the most fascinating markets, even rivaling commodities, is the low-priced stock market. These stocks are normally referred to as penny stocks and typically fall in the under the four-dollar range. Wide-eyed investors can get very worked up over the potential for a one-dollar stock that might suddenly wake up and spiral to ten, 12 or 15 dollars. Many of these companies encompass ideas or technologies that are unique, innovative and/or enchanting.
The combination of low prices, unknown fundamentals, hype and open-ended potential are too much for many investors to resist. That attraction is enough to keep these stocks over-priced. My own rough survey showed that less than two out of ten stocks under four dollars have any earnings at all, and 30 percent do not yield any measurable revenues. These fundamentals, when added to the fact that few companies with new technologies ever make shareholders any money, present a scenario where the decks are really stacked against the investor. The above concerns are the main reason that major brokerage firms limit any loans against stocks under four dollars and most do not allow any loans on stocks under two dollars. The opposite of the hype on low-priced stocks is the reluctance of many companies to split their stock to preclude undue speculation. The ultimate example of non-hype is Warren Buffet's Berkshire Hathaway, which trades at over 85,000 dollars per share. Only after pressure from the exchange and investors did the company agree to issue mini-shares that trade for a few thousand dollars. Many other U.S. corporations trade for higher than 100 dollars and in most of these cases, the company is resisting splitting the stock to preclude some of the speculation in their shares. The thinking is that the higher the price of the stock, the more resistance there is on the part of the speculative crowd to buy those shares. High-priced shares are found everywhere in Europe. Public markets began there in the 1600s and it is not surprising that many of the mature companies on that continent are not seeking hype in their stock in the short run. They know that any over-pricing in their shares must be reckoned with in the long run. They are more concerned with the consistency of the stock over the long term. Investors who can afford to pay 10,000 dollars to buy 100 shares of a 100-dollar stock are more likely to be looking at the fundamentals of the company than investors buying 100 shares of a one-dollar stock.
None of these traits dictate that investors should totally screen out all low-priced stocks. But just as in rock climbing, over-indulgence, even by the experienced, can be risky. And over-indulgence by the inexperienced can be positively dangerous.
L. Dean McGowan, Sr. VP Investments, UBS Financial Services, 5080 Spectrum Dr. Ste 1000W, Addison Tx 75001. 972-450-4322, 1-800-288-1515 (US & Canada), toll free from Mexico 001-800-010-1323. McGowan will be in Ajijic at La Nueva Posada Febraury 18-24. To make an appointment, call his office. There will be an investment workshop Monday, February 20 at la Nueva Posada Hotel at 10 a.m. The public is invited.
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