Reconsidering Penny Stocks

by: Mick Weinstein December 03, 2008 | about stocks: FNM / FRE / LVLT / RAD / SIRI    
Mick Weinstein

Mick Weinstein

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This is the first in what I hope will become a series of posts on the editorial process at Seeking Alpha - the opportunities, challenges and questions we confront on a daily basis. I hope this becomes interactive in comments, with my post just the beginning of the conversation.

• • •

Are penny stocks still the primary domain of pump-and-dumpers and stock spammers? You know what I'm talking about:


We've had a longstanding, blanket policy at Seeking Alpha not to publish articles that focus on stocks trading under $1. The reason: Our primary editorial goal in our opinion and analysis section is to bring readers insightful writeups from hundreds of serious investors and sector experts, while filtering out (1) the junk and non-market content that gets through automated aggregators, and (2) charlatans who attempt to manipulate stock prices by spreading misinformation.

Our $1 rule has been a simple and effective way to block the overwhelming majority of the bad guys, who require thinly-traded stocks to perform their dirty deed. While there have always been legitimate writers and investors in microcap and smallcap equities (Microcap Speculator comes immediately to mind), our rule required us to exclude these authors when they addressed penny stocks, to maintain a broader community of credible authors.

And then the market collapsed.

We're now facing a situation where four US-traded stocks with market caps over $500 million trade under $1: Fannie Mae, Freddie Mac, Level 3 and Sirius XM. If you pull that market cap figure back to $250 million, the number jumps to ten, and includes household names and popular portfolio holdings such as Rite Aid (RAD).

The sheer volume of stocks that recently fell under this threshold drove the Nasdaq to suspend its own delisting rule that previously banished stocks trading below $1 for more than 30 days to the over-the-counter exchanges:

By Nasdaq's count, the number of securities trading below $1 on the exchange rose from 64 to 227 in the 12-month period that ended Sept. 30. By Oct. 9, the number had risen to 344. In addition, another 300 Nasdaq-listed securities were trading between $1 and $2.

(The NYSE is still freezing trading in these stocks and then delisting - Thornburg Mortgage got this treatment today.)

Given this novel situation, our editorial team has been reassessing our rule and at times bending it. The risk of manipulation seems much lower on a stock like SIRI that has daily turnover of 50 million+ shares. So when we know and trust the author, we have been publishing on Sirius XM and the financials that dropped under a buck.

This applies to microcaps as well. We recently ran an article by longtime SA contributor Asif Suria on a portfolio holding of his that he finds to be trading below book value - at 73 cents. It's a solid writeup, and since we trust Asif fully, we wanted to make it available to our readers.

So while we're as diligent as ever in rejecting submissions that smell even faintly of stock manipulation (in any case, we accept only about 25% of submissions from new authors), we've opened the doors to trusted SA contributors who address penny stocks as investment opportunities in these extraordinary times.

What are your thoughts? Have we done the right thing, or should we have maintained the firm rule in any case?

Update 12/8/08: A case for the Nasdaq to eliminate its $1 rule entirely.

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This article has 31 comments:

  •  
    Dec 03 08:10 AM
    You are absolutly doing the right thing. Mel will bring success to SIRI !!
    Reply | Link to Comment
  •  
    Dec 03 08:17 AM
    I love your site and blog. I own a large amount of SIRI and really enjoy the insight. I also like the morning email keeping me up to date on the financial situation.
    Keep going.
    Ken
    Reply | Link to Comment
  •  
    Dec 03 08:30 AM
    Any thoughts on Acusphere (ACUS)? They have a date with the FDA on 12-10-2008 with regards to their Imagify. They are also trading under $1. A favorable review and they have what some consider a billion dollar product.
    Thanks,
    Joe Smejkal
    Omaha, Nebraska
    Reply | Link to Comment
  •  
    Dec 03 09:01 AM
    healthy execeptions are usually welcome news
    Reply | Link to Comment
  •  
    Dec 03 09:06 AM
    "The risk of manipulation seems much lower on a stock like SIRI that has daily turnover of 50 million+ shares."

    So why not make exceptions from your current rule based on one or more of the following:

    1. Market cap.
    2. Volume.
    3. Average price over the past year or two. (If well over $1).
    Reply | Link to Comment
  •  
    Dec 03 09:23 AM
    I don't like trading through rose colored glasses...Selective censorship.... or any other one sided fish wrapper... I may never read seeking alpha again.. after this timley revolation.....:K™
    Reply | Link to Comment
  •  
    Dec 03 09:59 AM
    Mick,

    I think your article selection is excellent and that includes under a dollar stocks. I appreciate your diligence.

    zag
    Reply | Link to Comment
  •  
    Dec 03 10:09 AM
    Great articles and good call. I am a long term investor in SIRI and enjoy the reading articles from SA. Like the one today by Tyler.
    Reply | Link to Comment
  •  
    Dec 03 10:11 AM
    It seems like the criteria are well thought out, like anything else I would say be 1. consistent and 2. watch for those that take advantage and block them if needed.
    Reply | Link to Comment
  •  
    Dec 03 10:14 AM
    You've done the right thing. This is an extraordinary time in the market's history. Some have called it once in a generation or once in a lifetime or once in 100 years event. Other mjaor rules have been adjusted to acommodate the current circumstances, so yours is right in step. I think if you didn't you would have your head in the sand.

    Within six months, you wil be able to once again resume your previous standards bar...almost by defacto. These companies to which you refer will not be under a buck then...one way or another.

    Appreciate your site and contents...
    Reply | Link to Comment
  •  
    Dec 03 10:20 AM
    It seems that with the downfall of almost every (real) company, that penny stocks can be a safer, and wiser choice at this time. With the recent news of a likely Federal funding for stem cell research, I see many chances of oppritunity. STEM, SCLL, PSTI, BCLI, ASTM, CCEL, and even PIP, and RGN. I have played here for some time now, and these stocks usually aren't effected much when the major company's are on a roller coaster. Safer, and cheaper, and the right time for something to happen. I think you have started something we would all like to hear more about, besides, pretty soon, they may all be penny stocks.
    Reply | Link to Comment
  •  
    Dec 03 10:41 AM
    I believe that volume should be the ONLY determiner. The ability of funds to short companies like SIRI and F is brought to light in the articles and the subsequent blogs. The Authors seem very parochial at times, but this is natural, as we all have opinions.
    Reply | Link to Comment
  •  
    Dec 03 10:42 AM
    There is a difference between boiler room promotions and listed stocks that have fallen on hard time.

    I follow specialty retail closely, especially apparel, and a number of companies have seen their shares drop below $1 or threateningly close: CHRS Charming Shoppes (Lane Bryant, Fashion Bug, Catherine's)), NWY (New York & Co.), CMRG (Casual Male XL, the only large chain for the "big and tall"), CWTR (Coldwater Creek), PSUN (Pacific Sunwear) $1.01, EBHI (Eddie Bauer) and FOH (Federick's of Hollywood) for example, in the apparel group and HMX and ZQK basically in wholesale.

    Elsewhere, in addition to RAD, I see ACMR, BONT, GMTN, PIR, RVI, SPCHA/ SPCHB and TUES.

    I don't mean to say these are or were big caps. Simply that lumping them in with the hundreds of "get rich quick" solicitations I and others receive every year (I just threw out a stack nearly four-feet high, abandoning my idea of finding an enterprising business reporter who would like to look into the several "middle man" companies that engineer these promotions) is kind of reckless.

    Perhaps you don't have software programs that could sort other than by price. If so, so be it.

    Appreciate your asking for input.
    Reply | Link to Comment
  •  
    Dec 03 12:30 PM
    It appears that SA is taking a balanced and reasoned approach to the most unusual market conditions (at least in my lifetime). Rules are important. However, understanding the reason for the rules and being able to be flexible with the rules where unusual circumstances warrant is the sign of wisdom and acknowledges reality. I support SA's limited coverage of issues trading under $1.00.
    Reply | Link to Comment
  •  
    Dec 03 12:36 PM
    Agreed, nominally cheap stocks do not become more legitimate when they go through a reverse split.

    Likewise, legitimate companies do not change in nature when the stock market panics.

    How about a minimum trailing volume criteria? That leaves much of the market and perhaps some great ideas unexamined, but avoids the possibility that SA could be used as a vehicle for pump & dump fraud.
    Reply | Link to Comment
  •  
    Dec 03 12:37 PM
    You've done good. But I think you could do better if you find a way to address the pent up demand for information on penny stocks. Just as there will always be schmucks that find losing >$1,000 on roulette at Vegas to be a relaxing family vacation, there will always be investors in penny stocks. Blanket policies like yours leave the door wide open to the boileroom charlatans you are trying to discourage. I speak as one of the schmucks! There is one PK penny stock I have my eye on (I won't mention it here to avoid being accused of pumping), which I know to be a legitimate, if highly speculative business in its development phase. I know there would be larger interest in the stock if there was an impartial source of information on it. Other than company press releases and pumpn' dump message boards there isn't one.

    Is there no way you can separate the penny stock wheat from chaff? Perhaps solicit reviewers the way you presently solicit writers? There have to be ways. This is more than just a convenience issue for amateur investors like me. Properly managed the OTC and PK could be a viable means for small, SMALL new businesses to become and stay liquid during their developement phase. The rampant presense of thieves and con men has largely prevented that from happening so far. We should not leave this potentially lucrative and productive investment avenue to them.
    Reply | Link to Comment
  •  
    Dec 03 01:09 PM
    I cover specialty finance companies, particularly mortgage REITs, which have obviously been decimated in this credit environment. Many of the stocks I cover are now on the BB / pinks due to the minimum price threshold, and I am strongly in favor of Seeking Alpha's decision to expand coverage of these stocks. I think normal quality standards should govern publication of any article, as readers of this site should have enough financial savvy to do his/her own due diligence before investing.
    Reply | Link to Comment
  •  
    Dec 03 01:14 PM
    As someone who follows and occasionally writes about a stock that is currently under $1/share (PRS), I personally appreciate the flexibility.
    The penny stock rule is definitely a solid idea, it just requires interpretation to differentiate the legitimate companies from the things being pushed by the ad you cite in the opening.
    Reply | Link to Comment
  •  
    Dec 03 01:18 PM
    right thing, guys. Everyone knows RAD for example, and we all know no one is gonna try to pump and dump that one. I hope it survives!
    Reply | Link to Comment
  •  
    Dec 03 03:02 PM
    mick...

    maybe do it by market cap rather than share price?
    Reply | Link to Comment
  •  
    Dec 03 03:40 PM
    You are doing the right thing. There are some real businesses trading under 1.00.
    Reply | Link to Comment
  •  
    Dec 03 05:05 PM
    Not all articles written require a specific stock name to be of importance to an investor. The ability to isolate the company from the sector would go worlds to opening up articles that are both interesting and pertainent to investors. I realise this is an investing website. I also realize that successfull investments always include diversification. Everyone has their own "next hot stock." There are obvious areas where the sector is grey. This grey area allows for an author to define what that sector truly is. I challenge some of your writers to generate "Nameless" articles. The articles can then contain the top & bottom twenty compaines in the sector for the search engines. This list would be dated and devoid of any opinions. With a larger listing of companies in the post you would engage more readers, and thinkers.
    Reply | Link to Comment
  •  
    Dec 03 05:22 PM
    In 1986 msft was trading for 10 cents. Bill Gates came on PBR and i bought 3000 dollars worth. I liked what i heard. I sold them in 1987 for 15000, and the only reason i sold my broker told me it was time to sell,,,remember Drexel, Burnham and Lambert? Well i lost big time, i should have held on. But guess what, i found another little gem in the making and many have not seen it yet.
    Reply | Link to Comment
  •  
    Dec 03 06:14 PM
    I second Roger's idea of using a combination of market cap, volume and price history would be the best approach.

    Interestingly that would disqualify my article about Towerstream but would introduce a consistent policy that your audience and contributors can look forward to.
    Reply | Link to Comment
  •  
    Dec 03 06:15 PM
    You are doing the right thing. Share price alone should not be the criteria. Stocks such as SIRI and the others are now broadly owned by many investor/readers, and the companies have a significant maket cap. You have been provideing coverage and should continue to do so. To drop coverage would be 'piling on' and just further depressing a popular stock.
    Reply | Link to Comment
  •  
    Dec 03 10:18 PM
    You should have maintained the rule. Stocks that fall below $1 do so becuse their future earnings prospects are extremely poor, or they have immediate trouble remaining a going concern (Fannie and Freddie). It's hard to perform a serious analysis on a company in that much trouble.
    Reply | Link to Comment
  •  
    Dec 04 06:44 AM
    I too see potential with the Bio-Tech industry, and also the larger companies like F and some of the other 300 stocks that have crumbled. My largest holding is BCRX, it has traded .90 to 1.80 recently. It usually runs $2-3.00. Most of this list are probably doubles at least. REGARDING FORD, I am just an average guy, shopping for a new (or slightly used) car or truck. There is not much inventory to select from...go shopping for a new '08 / '09 F-150. If you have not seen a new F-150 Lariat, you need to see them. They are superb. GM can not touch it. Their car line-up is super too. I am not writing this to hype F. Just stating an opinion that I think they make it, maybe even without the gov't bailout.

    On Dec 03 10:20 AM Movingonup wrote:

    > It seems that with the downfall of almost every (real) company, that
    > penny stocks can be a safer, and wiser choice at this time. With
    > the recent news of a likely Federal funding for stem cell research,
    > I see many chances of oppritunity. STEM, SCLL, PSTI, BCLI, ASTM,
    > CCEL, and even PIP, and RGN. I have played here for some time now,
    > and these stocks usually aren't effected much when the major company's
    > are on a roller coaster. Safer, and cheaper, and the right time for
    > something to happen. I think you have started something we would
    > all like to hear more about, besides, pretty soon, they may all be
    > penny stocks.
    Reply | Link to Comment
  •  
    Dec 04 09:07 AM
    I don't like to look at Penny Stocks. You could put a revenue limit on a company whose shares are trading under $ 1. Keeping in mind that a decent sized " grocery store" will do $ 30 to 50 million in sales per year.
    Reply | Link to Comment
  •  
    Dec 04 10:04 AM
    Please do NOT allow penny stock discussions: All financial sites eventually list toward tackiness, and SA must hold on to respectability. The Yahoo!Finance message boards and a thousand fly-by-night crap-meisters already cover the non-material companies.
    I would actually add volume and fundamentals restrictions.
    SIRI should be the only exception, as it is highly liquid.
    Reply | Link to Comment
  •  
    Dec 04 11:52 AM
    RAD just did a reverse split, FYI. This get the stock above 1 artificially at least
    Reply | Link to Comment
  •  
    Dec 04 02:17 PM
    I agree with your decision. I call these beaten up stocks "Phoenix stocks", see my SA article: seekingalpha.com/artic...

    This kind of recovery is not without precedence. Recall that Chrysler went from $2 to over $30 in the 1982-3 recovery. Magna International went from under $2 to over $80 in 1990-2.
    Reply | Link to Comment
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