NEW YORK (TheStreet) -- If you look around the Internet, you find no shortage of writers and message board regulars pumping the snot out of low-priced stocks such as Alcatel-Lucent (ALU), Frontier Communications (FTR) and Sirius XM (SIRI).As I noted Monday in an article where I discussed selling two low-priced stocks, including SIRI, and long plays on two others, there's nothing necessarily wrong with dipping into the sub-$5 netherworld. As long as you take bullish touts for the ALUs, FTRs and SIRIs of the world with a grain of salt and limit your exposure, there's no reason not to take part in this type of speculation. Who am I to tell you that my bull case for an investment in Nokia ( NOK) carries any more validity than the conviction that underlies your long position in ALU, FTR, SIRI or some other sub-$5 stock? However, if you're looking to invest a relatively small sum, say $1,500, or speculate in a sub-section of your portfolio, you really need to assess why you're going the low-priced route.
Be Weary of Back-of-the-Envelope MathDateline August 2000: ALU hits a high of $82.88. It's been practically all downhill since then. The stock now trades for about $1.58. It used to pay a dividend. That's long gone. But you still have folks who give themselves handles such as "Global Value Investor" asking questions such as "Can Alcatel Lucent Hit $5 Per Share?" with the flimsiest of cases supporting a long position.
And, despite FTR's 76% move down since August 2000 and slashed dividend, you still have tortured longs getting excited over one dead cat bounce after another. Then, of course, you have SIRI. This stock traded as high as $61 in 2000. It certainly created more bag-holders than penny stock millionaires, thus the full-force pumping we endure from SIRI loyalist longs on a daily basis. When a stock craters relentlessly from such heights over the course of many years, there's generally a reason. It's not market manipulation. Nor is it a scenario where a gaggle of permabulls gets it, while the rest of the world wanders around in a clueless stupor. Beware of the notion that some set of external forces created not only the decline, but the persistent stagnation in a stock that fell from grace.
Too often, we listen to the shallow arguments bulls make for a low-priced stock and we let what I like to call the"lifted skirt and perfumed inner thigh" of small numbers draw us in. It has quite the allure. A $1.50 stock is akin to a lady of the night staring seductively from across the bar. She makes you think silly thoughts -- you're young again. You're not bald. You don't have a gut. You can party all night. It sounds so appealing that, because you want to believe it so badly, you actually do believe it just long enough to get sucked in. That's what an ALU, FTR or SIRI quote page followed by a trip to the comments section of an article on one of these stocks can do to otherwise rational people. Technically, you're not lying to yourself because you really do believe it. The mind can play horrible tricks on us.