If you're the kind of person who'll buy irregular socks because they're $1 cheaper than ones that open at only one end, it may turn out that you're the kind of investor hunting for stocks to buy because they're trading for less than $10 a share.
Typically, stocks in the $10 bin represent a breed unloved by Wall Street. But every once in a while, a tarnished gem turns up on this discount rack. After year 2000 relegated many once-hot stocks to $10 land, many adventurous investors may be eager to hunt for bargains.
But analysts and money managers say, with a few exceptions, investors are better off buying stocks with a higher price tag that also have strong prospects of increasing revenues and profits. The bottom line: Most of the stuff on the racks at a consignment shop is junk; every once in a while you turn up a rare find that shouldn't have ever been discarded. The same holds true when screening for dirt-cheap stocks: You need to sift through a lot of crap to find the gems.
With this in mind,
screened $10 stocks, with a two-fold purpose. First, to demonstrate the blind spots inherent in screening for stocks, which should only be used as a starting point. Second, to take the screens a step further to see if there are any stocks worth a closer look.
The screen turned up several stocks that have lost their once-lustrous glows, including online brokers
( EGRP) and
( ATYT) (which
warned today that its first-quarter results would be lower than expected), Internet service provider
and former Linux highflier
These stocks might seem inexpensive now, fallen from their highs during the bull run of early 2000, but that doesn't necessarily mean there's currently an upward potential. "I think there's a handful of companies that in the near term are dead money," said David Hillal, senior analyst at
Friedman Billings Ramsey
Some others: mining company
, which one manager called a "disaster," and
( VERT), which had a cup of coffee with
Nasdaq's business-to-business giants before beginning its descent from $148 a share to its current $4.06.
"I don't think purely looking at old names that are down a lot is the way to go," says Michael Davey, a technology analyst at
in New York. "You want real earnings, not potential. When I think of Red Hat, I think potential. I don't want to be tempted by stocks that have lost 85% of their value."
Davey says he's looking to companies that have begun restructuring and may see fruits from those plans in 2001, such as
, trading at just over $5 after once trading above $50. (It didn't turn up in the
screen because its market cap is only $59 million.) "At this point in the market, there are plenty of quality companies with real revenues and real growth," he adds.
The first question bargain hunters need to ask themselves in the current environment is how these stocks ended up in the gutter. "If there was an earnings shortfall, you have to determine if there can be more earnings shortfalls," says Allan Meyers, a portfolio manager at
in Grand Rapids, Mich.
Meyers adds that stocks do get oversold and bargains do exist, pointing to a company such as
, which is now trading in the teens after being mired below $5 a share in early 2000.
But simply screening won't uncover a lot of these gems, says Joe Sunderman, an analyst at
Schaeffer's Investment Research
, a shop specializing in
options-related research. "There's still some misalignment of growth expectations," he says. "But you can look for companies doing stock buybacks or ones where insiders are buying the stock."
That's one mark against Red Hat, where insiders have been selling stock at a pretty steady pace this year, according to
Securities and Exchange Commission
The common names are "stocks that came to market when valuations were sky-high," said T.K. McKay, stock analyst at
. "Now, it's a different market altogether -- you have to eliminate the price decline."
McKay said that
screens were based on valuations proceeding from the long-gone bull run of last year. Despite their common occurrence, the companies that continually arose in value screening might not be a good value in the new market. "You have to look at Red Hat starting now," McKay said. "The issue is that you are looking backward in the screen."
Similar sentiment was expressed by Hillal when talking about another name frequently found in the sift --
. Microstrategy was one of the foremost leaders of the race downhill last spring, when it announced that its accounting principles were virtually make-believe and it tumbled in stock price. "It's an interesting play, but not a value play," said Hillal, "The company is still losing money."
It's the same with Red Hat. "The caveat is that its business model is somewhat of a problem right now," McKay said, "They are selling
software that you can essentially get for free." The Linux market is still developing and has yet to prove its worth against sturdy
operating systems. "You have to have some way to quantify the market that
a company is operating in," McKay added.
And you have to consider that the current market, unlike the one in 1999, is generally disinclined to give much leeway on once-hot companies with issues to resolve. "The past is the past," said McKay.
The upshot: Look forward, re-evaluate and don't always dress yourself from the discount bin.