Small-cap stocks are sometimes considered high-growth opportunities, but investors should be wary of this risky group.

The worsening macroeconomic picture has made life hell for some small-cap companies, forcing several out of compliance with listing requirements by the New York Stock Exchange. Last year, 54 companies were delisted from the Big Board for falling out of compliance, the worst year for NYSE expulsions since 2002. More than half of those suspensions occurred in the last three months of the year.

According to Scott Peterson, managing director of communications with NYSE Regulation, 29 of the 54 delistings in 2008 came because the average market capitalization of those companies fell below the $25-million threshold the NYSE has in place. An additional seven companies were suspended due to bankruptcy, the highest total since 2003, Peterson said.

With five companies already kicked off in the first month of the year, 2009 is off to an inauspicious start. Among those companies cast out of the NYSE are Nortel Networks, which recently filed for bankruptcy protection, as well as Kemet Corp. and W.P. Stewart. Several more companies are in danger of getting the boot, as more than 50 companies currently reside on the NYSE list of issuers that are noncompliant with some aspect of the continued listing standards.

We're not necessarily talking about small-cap companies that investors have rarely heard of. Among those in danger of losing their listing on the NYSE are several well-known consumer-related stocks. Retail book chain Borders Group ( BGP), car rental giant Avis Budget ( CAR), retail drug chain Rite Aid ( RAD), amusement park operator Six Flags ( SIX) and home furnishings company Pier 1 Imports ( PIR) have all received "continued listing" notices from the NYSE in the past few months and trade below $1 a share.

"Some of those names reflect the conditions in the general economy," said Robert Pavlik, chief market strategist with Banyan Partners. "I don't want to say it so blatantly, but these are second-class citizens. For instance Borders is second class to Barnes & Noble ( BKS), which is having its own trouble."

In tough times, it is common to see even healthy small-cap companies face a delisting warning from the NYSE or the Nasdaq due to either a sharp decrease in its stock price or a shrinking market cap. On the NYSE, a company is considered below criteria if the average closing price of its common stock is less than $1 a share over a consecutive 30-trading-day period.

Recently, though, the NYSE changed its stance on market cap restrictions. On Jan. 22, the NYSE filed a rule change with the Securities and Exchange Commission that temporarily reduced the average market capitalization required of listed companies from $25 million to $15 million, with the reduction lasting through April 22.

Peterson points out that the change in the market cap requirements is a return to pre-2004 levels. Between 2004 and 2008, the market cap standard threshold had been increased to $25 million. Curiously, despite toughened standards by the NYSE during those years, delisting totals for cause and bankruptcies were considerably less than years prior. For instance, delistings in 2004 were more than halved from the previous year, despite the increase in the average market cap requirement.

The picture is just as bleak on the Nasdaq, which has taken more extreme measures in order to help companies maintain their listed status. In October, the Nasdaq moved to suspend its minimum bid price and market-cap requirement until January before extending it once again to April 20, which has given some breathing room to noncompliant companies like Cell Genesys ( CEGE) and Aviza Technology ( AVZA).

Many small-cap companies, when faced with a delisting notice because of a violation of the share price criteria, are able to get their act together and regain compliance with the listing regulations on the NYSE within six months. However, if a company falls below the $15-million market cap mark, the NYSE immediately shows it the door.

"With the average market cap, it's more severe," Peterson said. "If your average market cap falls below $15 million now for over 30 days, you're out. That's it."

Currently, there are about 10 companies listed on the NYSE that are hovering just north of the standard and have a share price of less than $1. Those names include auto parts maker Visteon ( VC) and Interstate Hotels & Resorts ( IHR).

Investors who are seeking out penny stocks for their portfolio should strongly consider the consequences of being delisted from the NYSE before making an investment. There are reasons that companies struggle hard to keep their NYSE or Nasdaq listings. For one, many major institutions, pension funds and mutual funds will not invest in securities listed elsewhere. Additionally, it becomes tougher for companies to raise more capital if they lose their listing on the NYSE.

"The pink sheets are a great place to gamble away your money. At least when you go to Atlantic City or Foxwoods, you get free drinks," Pavlik quipped. "It's a sign of the times that the better companies are going to survive and last, while the other companies find that when they become delisted, they move into the wasteland of stocks."

Landing on the pink sheets isn't a death sentence, though. Consider that even international heavyweights Nestle and Roche currently reside on the pink sheets.

"I don't know that there's a direct correlation between being delisted and going bankrupt, but you could certainly assume there's some kind of connection," Pavlik said. "It doesn't necessarily mean it's going to happen. But when a company is delisted, I'm more suspect of it, and more red flags go up. More homework needs to be done."

And don't let a reverse-stock split fool you, as it's essentially a zero-sum game. If you have 1,000 shares of a 50-cent stock and after a reverse split you have 100 shares of a $5 stock, the value and fundamentals have not changed.

"It's just a book-keeping entry," Pavlik said. "The actual number of the dollar price is not supposed to have any correlation as to the quality of the company. If one company trades at $55 and another is at $155, that doesn't mean one is more solvent than another. But once I start seeing that, more flags should go up. They're trying to keep themselves from being delisted or be viewed differently by investors that won't look at penny stocks."

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