Low-priced stocks are usually shunned by most institutional investors such as mutual funds. But a careful analysis of low-priced stocks can sometimes yield some real values.
In the United States, low-priced stocks are not
taken seriously by most professional investors. They
do not follow them and generally consider them to be
in the realm of speculation. In fact, some brokerage
firms will not allow many of their customers to buy a
stock which is selling below a certain set price,
usually five to 10 dollars a share.
But financial advisor Gene Walden believes there are
real values in low-priced stocks if investors know
where to find them. Mr. Walden has written numerous
books for individual investors. He says that by "low-
priced' stocks, he means those that trade in the
United States between three and 15 dollars per share,
not those under one dollar or the so-called "penny
"They are mostly junk. Usually they are very small companies with maybe two or three employees. They are highly speculative and trade for pennies because they are worth pennies. They have very little value and very few of those stocks will ever be worth even a dollar."
But among stocks trading for at least three dollars a
share, Mr. Walden says there are some gems, stocks
that have the potential to double, triple or even
quadruple in a relatively short period of time.
"Companies like Cisco Systems and Microsoft which are trading between 60 and 100 dollars a share have tremendous growth potential. But, for the most part, big stocks just do not have the same kind of growth potential. These 10 dollar stocks, young companies, really do have the potential, if they are good, to double or triple in a year. That is the "home run" you are swinging for. They will certainly not all give it to you but if you hit it right, you can really have dramatic growth."
Mr. Walden, author of a new book titled
The Best Stocks for Under 20 Dollars, says revenue and profit growth histories were the two main factors he examined in selecting the stocks. Of those two, he says revenue growth is the most important.
"Most small companies go through two to four years without any profits in many cases. So, the only thing you can look at is sales, are they increasing and how much? That is by design because these companies pour everything they earn back into building the company."
Financial advisor Gene Walden is also careful to satisfy himself that a company's business is
sustainable, not a fad and not something that is on the verge of being replaced by a new technology.
The key, Mr. Walden says, is to try to identify companies that, within a few years, will be discovered by the large institutional investors and financial analysts. After such discovery, he says, a formerly low-priced stock is usually on the way to becoming a high-priced stock.
"Then you get a double benefit. You get an expansion of the price-earnings ratio because of the interest by Wall Street. And, the continued growth of revenues and earnings will also push the stock price up. So that is where you get a big multiple on the stock price growth."
Mr. Walden cautions that an entire portfolio of low-priced stocks is risky, even if they have all been carefully screened. However, he thinks a representation of selected low-priced issues can make a major contribution to overall asset growth for individual investors.
Copyright © 1999 by The Investor's Library