The myth has been old and strong -
Wal-Mart Stores Inc.
) were once penny stocks. Jordan Belfort (at least as seen in
Martin Scorsese's movie
The Wolf of Wall Stree
t) 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
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
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
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
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
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
These included the likes of:
): 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.
): 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.
): This leading supplier of driveline systems, modules and
components for the light vehicle market took a severe hit when
General Motors Co.
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
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.
): 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
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.
): 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).
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
CITIGROUP INC (C): Free Stock Analysis Report
GENERAL MOTORS (GM): Free Stock Analysis
LAKE SHORE GOLD (LSG): Free Stock Analysis
MICROSOFT CORP (MSFT): Free Stock Analysis
OFFICE DEPOT (ODP): Free Stock Analysis
TRANSATL PETROL (TAT): Free Stock Analysis
WAL-MART STORES (WMT): Free Stock Analysis
To read this article on Zacks.com click here.