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[转贴] Beware the "Blue Chip" Penny Stocks

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发表于 2009-3-30 02:56 AM | 显示全部楼层 |阅读模式


March 10, 2009   (outdated, but should be still good to know)

Let's play that good old-fashionedpsychologist game, word association.  We will throw out a company name,you make note of the first thing that pops into your head.  Level 3Communications (LVLT), American International Group (AIG), Sirius XMRadio (SIRI), Tenet Healthcare (THC), Fannie Mae (FNM), InfineonTechnologies (IXF), Genworth Financial (GNW), E*Trade Financial (ETFC),and Coeur D'Alene Mines (CDE).  
Done with that group?  Okay, let's add some others tothe mix:  Unisys (UIS), Rite Aid (RAD), Ballard Power Systems (BLDP),Citigroup (C), and Blockbuster (BBI).  Think about the first word thatpopped into your head for each of these - was it penny stock?  Odds areit wasn't, because not many people think that companies with marketcaps as large as these could be penny stocks.  However, all of thesecompanies are trading under $1 currently.

Penny stocks have long been enticing to investors as potentiallyholding a major potential reward - and that is the problem here, theword potential.  There is an old country adage that potential isanother word for failure - but we'll take a look at that in a minute.
What is alluring to many novice investors is that you could own ashare of Level 3 for less than a dollar - same with a share of CoeurD'Alene or Citigroup.  However, does the potential loss outweigh thereward?  There are 1000s of trading accounts in America filledwith stocks bought under $2.00 that are now worthless.  

Many different definitions exist for penny stocks, but the one constantis that the stock is low-priced and often holds a small market cap. Interesting, by following this definition, Citigroup would likely notbe a penny stock, nor would any of the other names mentioned earlier. But yet they are trading below $1, so they inherently are very risky.  That said, you can own shares of former market powerhouses for lessthan a buck - is it worth a shot?  Let's take a look at a chart ofCitigroup.  This is a daily chart spanning back to early July 2008. The stock's near-term high of $23.50 was hit in October 2008, but thenthe stock was hit - hard.  With the stock wallowing under a dollar, isthis penny stock a buy?
C Daily Chart
In general, the answer would be no.  Stocks under $5.00 aregenerally high risk, under $2.00 are very high risk, and under $1.00are usually going to 0.  Many micro-cap companies with shares under$1.00 (the kind you get random "hot tips" about) are in fact actuallyscam/sham/shell companies, whose shares are being manipulated by agroup.  Many mutual funds cannot even buy shares of companies tradingunder $10.

In the unusual case of gigantic companies trading under $1.00 that weare seeing today, the answer of whether to buy these is also basicallyno.  These companies are not in general going out of business -- butwhat will likely happen (what the market is pricing as anextremely high likelihood of happening) is that the equity (commonstock) will go worthless, the company will re-organize, pay off debtors(to some degree), then either re-issue new shares eventually, goprivate, or merge.  But the common stock holders get nothing in mostall cases.

Could some of these former blue-chips trading under $1 come back? Certainly.  But the odds are very strong that they will not.  So bewarethe bottom-fishing on these types of names, unless you are prepared todeal with the stock going worthless.

Many traders fall for the allure of the penny stock, especially whenthey first begin investing.  They figure they can buy 1000 or moreshares of one stock vs 10 of another.  However, if that penny stockgoes to zero, you still lose all the $ you put in.  So tread verylightly and do all the research you can before dipping a toe into thepenny stock pool, even for the big names.  

There is a reason penny stocks are penny stocks, perhaps it is poormanagement, poor business plans, poor execution of saidplan, a violent economic turn, too much debt, or just an avalanche ofshort selling and negative sentiment.  Whatever the reason, make sureto perform your due diligence when it comes to speculating in extremelylow priced shares.

Scott Downing
发表于 2009-3-30 02:57 AM | 显示全部楼层
THANX
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发表于 2009-3-30 06:26 AM | 显示全部楼层
thanks
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发表于 2009-3-30 08:50 AM | 显示全部楼层
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