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The Hazards of Low-Priced Stocks

Stocks in this article: ZNGA F RSH BBY

NEW YORK ( TheStreet) -- If Zynga (ZNGA) didn't prove it last week, nothing will: Low-priced stocks can get you killed.

I allocate a very small portion of my portfolio to low-priced, speculative stocks. Because of this, I can stay calm -- and long -- ZNGA because the 40% on-paper loss really doesn't do much to harm the overall health of my portfolio. Throw in a few more ZNGAs and there's a problem.

That said, if you're going to dive deeper into low-priced names, you need a good guide. There's really nobody better than David Peltier, who runs the TheStreet's Stocks Under $10 premium service. ( Sign up for a free trial to get a feel for David's work.)

In any event, I lean toward slapping a personal sell rating on most low-priced stocks. Generally, they're low-priced for a reason. Often, the market, for one reason or another, has mispriced a stock, but don't fool yourself into believing that happens frequently in the sub-$10 underworld.

About a month ago, several readers ripped me for suggesting investors stay away from Ford (F). Since then, the stock has plummeted nearly 11%, closing this past Friday at $9.00, below that $10 mark.

By most accounts, Ford just has to rise again (it's destiny!), even though it has done nothing but drop or stagnate over the last year and a half. The numbers, particularly Ford's absurdly low forward price-to-earnings ratio, suggest considerable upside.

Viewed from another, more qualitative, perspective you really have to ask yourself where this upside will come from.

First, there's no guarantee that Ford will not lower expectations again, particularly in Europe, which could render forward-looking projections moot. Second, it not only needs Europe to recover; it needs the European public to start buying its cars as part of a recovery. Third, domestic sales represent a bright spot for Ford. Do you really see them getting much better than they are now?

In the auto space, it makes more sense to look at Tesla Motors (TSLA). Although I'm not head-over-heels bullish on TSLA, it puts out a much less messy blueprint for success than Ford. Tesla sells a limited number of very expensive cars to an affluent, targeted niche market that, to the extent Tesla needs, does not feel economic shocks like folks in lower income categories do.

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