Is It
OK to Buy Low-Priced Stocks?
Some
people confuse the definition of a low-priced stock with the definition of
a “penny stock”. Many investors consider a stock to be a "penny stock" if
it trades at or under $5.00 per share and trades in either the "pink
sheets" or on the NASDAQ. A good definition for a low-priced stock is a
company that has real assets, such as equipment and inventory, and is
engaged in some real business, such as manufacturing, and its stock price
per share is traded at a discounted value relative to the real worth of
the assets.
To
clearly understand the difference between a “penny stock” and a low-priced
stock, two companies (Alvarion Ltd. and Enron Corporation) fundamentals
are evaluated. Alvarion Ltd. (NASDAQ: ALVR) is a Tel – Aviv, Israel based
company and leading provider of Broadband Wireless Access (BWA) solutions.
Enron Corporation (NYSE: ENE) is based in Houston, Texas and provides
products and services related to natural gas, electricity and
communications.
Based
on assessments of the companies as of December 16, 2001 ALVR and ENE
prices at the market close were $3.34 and $.63 per share, respectively.
From the surface both companies could be perceived to have characteristics
of both a “penny” and “low-priced” stock. One could further perceive that
ENE is a lower priced stock than ALVR.
Review
of the company’s fundamentals reveals some very interesting details. ALVR
has $6.72 per share in cash after subtracting all its long-term debt, an
equity ratio of 98.14 percent, and $206.76 million in working capital. In
addition, ALVR has a median expected growth
rate of 35 percent going forward and is believed by some to become
the dominant player in its niche in the first
quarter of 2002.
ENE has a negative $26.68 per share in cash
beyond its long-term debt. That implies investors are buying the stock for
$27.31 (closing price minus cash per share beyond long-term debt) although
its quoted price is $.63. ENE that traded as high as $84.88 per share in
the prior 52 weeks, has an equity ratio of 31.53 percent, working capital
of negative $2,158 million, and a long line of suitors. ENE appears to not
be a “penny” or “low-priced” stock based on the above definitions.
These
analyses are not presented as a recommendation to buy or sell either one
of these companies stock but to identify that the definitions of both
words need further clarification. This is a clear reminder that investors
should be careful and not skip the process of researching
companies’ prior to investing their hard
earned money. These analyses convey that with the appropriate preparation
a stock could be purchased at any price regardless of the label assigned
to it.
by Harold Flowers - knowledge@ooh-wee.com
