NEW YORK ( TheStreet) -- After Znyga (ZNGA - Get Report) announced cost reductions resulting from laying off over 500 employees (18% of the workforce) is it time to buy the stock? The short answer is no, the shares aren't cheap enough to justify the risk.
The first thing to keep in mind is that any stock trading under $5 should first be treated as a bankruptcy candidate. Usually there's a compelling reason why stocks fall under $5 a share, and all sorts of negatives are triggered. Many brokers do not allow low-priced stocks to be sold on margin. In turn, some investors will need to liquidate shares, add more money or a combination of both.
Many funds won't consider stocks under $5 (with good reason), and the likelihood of finding a stock that falls below $5 on an analyst upgrade list is about as high as my ability to log into Facebook (FB) without countless annoying invites to play "Bubble Safari" or some other online game.
The next thing that investors want to keep in mind is that a strong first move is usually the right move. When stocks implode from damaging news, quick sellers leave because they fear a trend continuation. Zynga has many shareholders who are mentally coming to grips with the fact their investment is worth 20% less today than it was only a few days ago.Many are on the fence trying to determine if they should remain and hope for the best, or exit now to avoid the possibility of further losses. You might be one of them. Sometimes taking a painful but relatively small loss is the right choice. In the trading world there is an old saying: Your first loss is your best loss.
What that means is doubling up to reduce your average cost and/or "hoping" for a quick comeback usually results in even greater losses. When the market is telling you that you're wrong, it's generally appropriate to listen. The key is to evaluate what the market is saying with what the financial reports are saying. Take Apple (AAPL), for example. Apple is down significantly from a high of over $700 per share, but appreciated each of the last four years. With half a year to go, Apple can still end higher for 2013.