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Posted 10/12/2000
Kenner & Niederhoffer
What's next for
Wall Street
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Extra!
Big stocks under $5: real bargains?
Research shows that one-time NYSE stars now selling for less than a latte can return to favor fast. Here's a list of 25 of these cheap stocks, which also show net insider buying.
By Victor Niederhoffer and Laurel Kenner
“Where be your gibes now, your gambols, your songs, your flashes of merriment that were wont to set the table on a roar?”
-- William Shakespeare, "Hamlet"
Stocks, like people, tend to move in a certain direction until achieving their goal. One destination often achieved is the round number. The psychological importance of whole numbers is obvious; that’s why products are priced at $9.95 and $1.99. That’s why when they fill your gas tank you often end up paying exactly $20 -- or today, $30. That’s why many green traders place a stop order at a round number like five or 10 and find themselves stopped out at that price, only to see the stock stage a beautiful move in the direction originally hoped for. As our friend Don Staricka puts it in his “Devil’s Stock Market Dictionary,” a stop loss is “the point immediately below which an equity begins a sustained rally.”
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But there lies the opportunity. Round numbers are vivid numbers that tend to focus attention. Once the level has been reached, decision-makers are open to revise their thinking as to how low or how high the stock can go. This probably explains why our Down 35 list of stocks that fell from above $200 to below $100 this spring has outperformed the Nasdaq 100 ($NDX.X). The Down 35 is up 8.6% since we recommended it in this column on April 28 -- no mean feat considering that the Nasdaq 100 is down 15% for the period.
A drop below a round number can show large selling or a major reevaluation of a stock’s worth, and it’s usually a case of both. For a stock to go below $5, for example, it must break below an accumulation of actual and mental limit orders to buy at that price. For a stock to stay below $5 involves a major revision in consensus as to its value. In many cases, a stock below $5 is considered a penny stock. Certainly it is a “cheap” stock, with all the negatives that implies.
Today, we consider stocks that fell from above $10 on the New York Stock Exchange during the previous two years to a closing level below $5 at the end of 1999.
Yesterday's friends
Going through the list of these Beaten-Down Below $5 stocks is like shopping in an as-is thrift store, as was the fashion when Laurel was in the single digits. Many of the selections still bear the labels of high-priced department stores or boutiques. Some are well made, if touchingly out of style. Some, in the hands of a talented stylist, can look stunning, particularly if worn by a beauty.
Kenner & Niederhoffer
Victor Niederhoffer has traded stocks, currencies and futures worldwide for the past 40 years; he is the author of "The Education of a Speculator." Laurel Kenner is a trader and former Bloomberg markets editor. In this series of columns for MoneyCentral, they'll assess the past week's Wall Street performance and next week's prospects. Let us know what you think in the Start Investing Community.
On the Beaten-Down Below $5 stock racks, we see many old friends we used to consider eminently attractive in the $20s, $30s and $50s. Many are in the fields of finance, petroleum, gold, apparel, health management and retailing.
There was a time when these companies were proud members of the New York Stock Exchange. According to stock exchange officials as well as the companies themselves, they had good prospects and every chance of continuing as respected citizens of the NYSE burgh. (The exchange is famous, if nothing else, for draconian listing requirements, as well as the difficulty of becoming delisted once the glamour of ringing the opening bell wears off and the costs begin to feel heavy.)
Many in the Beaten Down Below $5 list were once considered companies with unyielding brand loyalty, “untouchables” of the kind that inspire rhapsodies from the famous Nebraskan: Fruit of the Loom (FTLAQ, news, msgs), Fresh Del Monte Produce (FDP, news, msgs), Pep Boys (PBY, news, msgs), Rite Aid (RAD, news, msgs), Bombay (BBA, news, msgs) and Congoleum (CGM, news, msgs).
There was a time when these companies were proud members of the New York Stock Exchange. According to stock exchange officials as well as the companies themselves, they had good prospects and every chance of continuing as respected citizens of the NYSE burgh.
A needed buffer
It is our hypothesis that the mere fact that a listed company was once good enough to sell at a price above $10 provides a certain buffer when it hits a rough stretch of the road.
To test this hypothesis, we took all the NYSE-listed companies that closed below $5 at the end of 1997, 1998 and 1999 but had traded at $10 or above in the previous 24 months. We used the Standard & Poor’s Stock Guide to make sure that the companies we chose were actually available for purchase at the time of the hypothetical decision.
We evaluated 100 stocks, following the companies through ticker changes, delistings, acquisitions and bankruptcies. Here are the results:
| Period | Performance |
| 12/31/1997-12/31/1999 | 41% |
| 12/31/1998-present | 86% |
| 12/31/1999-present | -8% |
During this time, the New York Composite Index rose at an annualized rate of 11%. Taking account of the variability among the 100 companies, these results are significantly better than the performance of the New York Composite Index, at the usual confidence levels used to differentiate real differences from random ones.
In the 1997 group, 12 of the 30 companies were delisted, three were acquired at significant discounts and four lost all of their value; nevertheless, the group rose 41% through the end of 1999, compared with 27% for the New York Composite.
Fortuitously, there were some extraordinary gains. The class of 1997 included Mercury Finance, now known as MFN Financial (MFNF, news, msgs), up 1,056%; and Rogers Communications (RG, news, msgs), up 408%. In the 1998 group, Corimon SA (CRM, news, msgs), a Venezuelan paint company, rose 1,131% and Groupe AB SA (ABG, news, msgs), a French television programmer, rose 719%. Oil stocks that sold for less than $5 at the end of 1998 have done exceptionally well: Chesapeake Energy (CHK, news, msgs) rose 667%, Howell (HWL, news, msgs) gained 473%, and Tatneft, an oil company in Tatarstan, Russia, rose 410%.
Because of these erratic performances, the stocks should be considered as a portfolio rather than as a group to be cherry-picked for a company or industry that seems to be perfect.
As to why these companies outperform, we can only speculate. Perhaps the NYSE listing carries value, whether the benefit comes from the exchange’s certification or the company’s intrinsic value. High perceived risk is always a nice base for speculation, and the risk is high enough to make these stocks off limits for most money managers. Perhaps, as Francis Bacon wrote in his 1625 “Essays,” “Prosperity doth best discover vice, but adversity doth best discover virtue.”
An embarrassment of riches
Right now, in any case, these stocks have an additional factor going for them: the attractive state of the market after five weeks of declines. S&P 500 futures have declined 155 points since Sept. 1, one of the largest slides in the last 15 years. Quantitatively and qualitatively, such times have the expectations for future rises, with the usual caveats for questions of this magnitude.
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We would be pleased to send this list of stocks to any correspondents. However, we feel it appropriate to provide one further time-tested screen to winnow this group of stocks down: namely, net insider buying in the last four months. Strangely, and rather pleasingly, 22 of these companies show net insider buying, as compared, for example, to the one or two out of 100 in the Nasdaq 100.
| Company Name | Oct. 10 Price | 52-Week High | Market Capitalization |
| Aurora Foods (AOR, news, msgs) | 3.19 | 14.63 | 205,572,000 |
| Budget Group (BD, news, msgs) | 3.63 | 10.44 | 132,722,000 |
| CSK Auto (CAO, news, msgs) | 4.06 | 21.25 | 111,358,000 |
| Chyron (CHY, news, msgs) | 2.56 | 13.19 | 90,791,000 |
| Carmike Cinemas (CKE, news, msgs) | 0.81 | 13 | 7,836,000 |
| Encompass Services (ESR, news, msgs) | 5 | 11.44 | 288,356,000 |
| Atchison Casting (FDY, news, msgs) | 4.13 | 11.13 | 32,611,000 |
| Mississippi Chemical (GRO, news, msgs) | 3.5 | 10.75 | 94,768,000 |
| Global TeleSystems (GTS, news, msgs) | 3.75 | 36.5 | 694,344,000 |
| Hanger Orthopedic Group (HGR, news, msgs) | 3.94 | 13.63 | 75,640,000 |
| IKON Office Solutions (IKN, news, msgs) | 3.44 | 9.63 | 492,265,000 |
| IT Group (ITX, news, msgs) | 3.94 | 10.56 | 85,695,000 |
| Luby's (LUB, news, msgs) | 5 | 12.81 | 112,100,000 |
| Meadowbrook Insurance Group (MIG, news, msgs) | 4.25 | 10 | 35,648,000 |
| Mail-Well (MWL, news, msgs) | 4 | 13.94 | 212,523,000 |
| Navigant Consulting (NCI, news, msgs) | 3.06 | 41.13 | 121,339,000 |
| National Equipment Services (NSV, news, msgs) | 4.44 | 11.38 | 94,533,000 |
| Personnel Group of America (PGA, news, msgs) | 2.88 | 11.69 | 73,283,000 |
| Phosphate Resource Partners (PLP, news, msgs) | 4.5 | 10.69 | 446,396,000 |
| Rite Aid (RAD, news, msgs) | 4 | 13.25 | 1,050,830,000 |
| Silicon Graphics (SGI, news, msgs) | 3.88 | 13.5 | 673,139,000 |
| Service International (SRV, news, msgs) | 2.25 | 10.81 | 612,233,000 |
| Systemax (SYX, news, msgs) | 2.56 | 11.38 | 85,261,000 |
| Warnaco Group (WAC, news, msgs) | 2.75 | 16.94 | 141,636,000 |
| WorldPages.com (WPZ, news, msgs) | 3.5 | 18.38 | 157,885,000 |
While we cannot point to any study directly relevant to insider buying of distressed companies of this nature, everything we know about the market indicates that a group of stocks that officers and directors are buying is in the main more attractive than those they are selling, other things being equal.
The list of $10-to-$5 stocks that meet the insider buying test appears above. We own a couple of these ourselves, and intend to buy more after this article is published. We would caution that many will doubtless be delisted, file for bankruptcy protection or otherwise disappoint their owners. This is a very volatile group of stocks and a very volatile system. It is the kind of portfolio that should be assigned a small part in a person’s portfolio so it will not affect one’s lifestyle in any way if total disaster ensues.
At the time of publication, Laurel Kenner is long Carmike Cinemas and IKON Office Solutions.
MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.