The myth has been old and strong – Microsoft
Corporation (MSFT) and Wal-Mart Stores
Inc. (WMT) were once penny stocks. Jordan Belfort (at
least as seen in Martin Scorsese’s movie The Wolf of Wall
Street) utters the same myth in order to sell the penny
stocks. Jordan Belfort had also said: “As long as it gets done, it
doesn’t matter how.” With that belief many traders might trick
investors to buy or splurge money on penny stocks, but that might
peter out the entire investment.
Before we discuss why investors should stay away from the risky
penny stocks, let us take a look at the theory and practice.
What Are Penny Stocks?
According to Investopedia, penny stocks trade at a relatively
low price and market capitalization, usually outside of the major
market exchanges. These are highly speculative shares being offered
by very small companies that hardly have any track record.
Generally market capitalization of a penny stock is between $50 and
$300 million. Most importantly, low liquidity is a key catachrestic
of these stocks.
The Securities & Exchange Commission (SEC) classifies stocks
under $5 to be a penny stock. Some also consider $3 to be the
benchmark, while many consider stocks lesser than $1 to be a penny
stock.
Were Microsoft and Walmart Penny Stocks
Ever?
These two stocks were never penny stocks! What has confused
investors is their ‘split-adjusted’ price.
Following stock splits, there were adjustments made to these
stocks’ historic price to show the effect. Accordingly, the
historic price on paper dropped below a dollar, but that never
means the stock ever traded at that level.
The tech behemoth Microsoft had closed at $28 a piece on its
debut on Nasdaq on Mar 13, 1986. In fact, the historic low for
Microsoft is around $15. Considering the stock splits for Microsoft
so far, the price on the debut day would drop way below $1.
The same logic of stock splits applies to Walmart, which had its
initial public offering in 1970 at a price of $16.50. The stock was
unlisted on major benchmarks for a couple of years and traded "over
the counter." It got listed on the New York Stock Exchange in
1972.
Wolves May Bite
Jordan Belfort is known to many for his rags to riches headline
story and for being convicted for manipulation of the stock market.
Now a motivational speaker, he ran a ‘penny stock boiler room’ and
earned millions by selling investors the "penny stocks."
The U.S. Securities and Exchange Commission or related legal
bodies have often send subpoenas to broking houses for selling or
often compelling investors to buy these dubious micro-cap stocks.
If the regulatory bodies have often jumped into action to safeguard
investors, there obviously is something wrong with these stocks or
the act of trading.
The Pink Sheet or OTCBB stocks are not required to match the
minimum standard requirements to be listed on exchanges. Moreover,
Pink Sheet stocks are not liable to file documents with SEC and
thus investors hardly have any timely information about the
company.
Going Home with Profit – Your Choice
Jordan Belfort said this too: “Success isn’t only about what you
do. Its also about what you don’t.”
Like Belfort or his company Stratton Oakmont, there were and are
other businessmen who had mastered the skill of selling penny
stocks. For example, Robert Emmet Brennan ran the infamous First
Jersey Securities. We have also seen the U.S. SEC filing charges
against Park Financial Group following investigations of its role
in running pump and dump scheme in 2002-03.
So be careful to stay away from the pink sheet or fall prey to
the ‘pump and dump’ strategy. There have been tales of people
becoming super rich by investing in penny stocks, but there are a
larger number of stories where investors’ wealth has been “pumped
and dumped.” Thus, it is a safer bet to invest in securities with a
proven history, a large market capitalization, high liquidity and
one that conforms to the listing norms.
When $1 Turned Big
Interestingly, we have had examples of major companies that
traded below $1 at a time and have now jumped manifold. However, it
was just their price dropping to or below a dollar and nothing else
qualified them as the micro-cap or the dubious penny stocks.
These included the likes of:
Citigroup Inc. (C): The financial behemoth’s
share price had hit an intra-day low of 97 cents on Mar 5, 2009
before closing at $1.02. On Mar 3, 2009, the stock had a Zacks Rank
#3 (Hold). The slump in share price was a beating the stock got
during the financial crisis and in no way can one call Citigroup a
penny stock. The company currently has a market capitalization of
about $150 billion and is trading at $48 a piece.
Office Depot, Inc. (ODP): The specialty
retailer saw its shares dropping to 59 cents on Mar 9, 2009;
another recession victim. In Feb 2009, the stock had a Zacks Rank
#4 (Sell), which was upgraded to a Zacks Rank #2 (Buy) on Apr 30,
2009. With market capitalizations of $1.5 billion, this
office products and services supplier is currently trading at over
$5.
American Axle & Manufacturing Holdings Inc.
(AXL): This leading supplier of driveline systems, modules and
components for the light vehicle market took a severe hit when
automakers General Motors Co. (GM) and
Chrysler got bankrupted. On Mar 9, 2009, the
shares had closed at 29 cents. While on Feb 7, 2009, the stocks had
a Zacks Rank #3 (Hold), on Mar 25, 2009 it got upgraded to a Zacks
Rank #2 (Buy). The company currently has a market capitalization of
$1.45 billion and is now trading over $19.
Want to ‘Start Small, End Big’?
If you are interested in buying stocks that technically are not
penny stocks but are trading below $1, here are two options:
These two stocks sport favorable Zacks Rank, have market
capitalization of at least $1 billion and are also seeing positive
earnings estimate revision of late.
TransAtlantic Petroleum Ltd. (TAT): This
international energy company owns interests in 3.9 million net
onshore acres of developed and undeveloped oil and natural
gas. The latest operational update provided by the company
noted it has three active rigs in southeastern Turkey, one active
rig in the Thrace Basin in northwestern Turkey and one active rig
in Bulgaria. It expects to drill about 33 to 49 wells in 2014.
It currently carries a Zacks Rank #2 (Buy) and has market
capitalization of $291.28 million. The stock is current trading at
78 cents (as of Feb 20).
TransAtlantic is expected to announce its fourth quarter 2013
earnings result in mid-March.
Lake Shore Gold Corp. (LSG): This gold miner
acquires, explores and develops gold properties in Canada. In
January the company reported that the preliminary 2013 operating
cost per ounce sold beat its guidance. Company president and CEO
also said: “We have completed a very successful year in 2013,
including four consecutive quarters of cost improvements, four
consecutive quarters of improved grades, increased mill throughput
volumes that were 60% higher at year end than when the year began
and record production of 134,600 ounces of gold (previously
announced on January 7, 2014), which achieved the top end of our
guidance for the year.”
It currently carries a Zacks Rank #2 (Buy) and has a market
capitalization of $344.96 million. The stock is trading at 83 cents
(as of Feb 20).
To Conclude
Former Stratton Oakmont executive Andrew Greene has recently
sued Paramount Pictures and other producers for his portrayal in
Oscar nominated movie Wolf of Wall Street. Greene says the manner
in which he has been depicted in the motion picture has distressed
him. Similarly, the truth about the value of penny stocks is only
relative, a partial truth at best.
AMER AXLE & MFG (AXL): Free Stock Analysis Report
CITIGROUP INC (C): Free Stock Analysis Report
GENERAL MOTORS (GM): Free Stock Analysis Report
LAKE SHORE GOLD (LSG): Free Stock Analysis Report
MICROSOFT CORP (MSFT): Free Stock Analysis Report
OFFICE DEPOT (ODP): Free Stock Analysis Report
TRANSATL PETROL (TAT): Free Stock Analysis Report
WAL-MART STORES (WMT): Free Stock Analysis Report
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