If you love penny stocks (and judging by the number of stocks that have fallen into the penny range over the last 18 months … you many), then the last month has been one of remarkable optimism, or great pessimism.
From March 9 to April 9, the Dow Jones average rose 23%, the S&P 500 rose 26% and the Nasdaq Composite rose 30%. Small-cap stocks were well ahead of large ones, with the Russell 2000 index up 36% over the same period. According to Howard Silverblatt of S&P, this was the sharpest 23-day increase since 1933.
A recent rise in U.S. stock prices has prompted one investment officer to say the rally was “too explosive to be sustainable.” According to Birinyi Associates, if low-cap stocks outperform high-cap stocks to such an extent after bear markets, rallies are fading.
Will history repeat itself? Will low-cap stocks and penalties continue to rise?
According to one article I read (and undoubtedly ten times more to the contrary), pessimistic views seem to be based on one main assumption – that history is a good guide for the future.
And it often happens. Except when history has little to offer for comparative analysis. While we’ve all lived to talk about past bear markets, we haven’t seen anything like it in the past year or so.
In fact, it has probably been a century since the economy experienced a sharp decline in the velocity of money, like last year. Since 1907, the US economy has not experienced a real panic, as in late 2008.
Larry Summers, chief economic adviser to President Obama, said in late 2008 the economy behaved like a ball falling from the edge of the table. Almost every major piece of economic data, the article notes, resembles the front half of a “V” starting around September.
Car sales fell to a level well below the level of recycling, while home sales fell to just one-third of the amount needed to keep up with key indicators such as population growth. The combination of a rapid decline in economic activity, rising foreclosures and mortgage defaults, and market accounting has led to large losses in banks and a panicked sell-off.
According to some financial analysts, the economy and the market are only rebounding from the historically rare events of last year.
If so, and most stocks fall and trade at seemingly bargain prices, how can we separate penny stocks from strain? After all, even fine penny stocks have seen investors overreact by sending their stock prices off the table. But what penny stocks are going to jump … and what deservedly fall?
During a regular bear run, markets will correctly predict the value of many stocks and their discounts accordingly. A 50% price cut is certainly a mark-up, but it’s not a profitable deal if the company’s value has been halved, if business units have deteriorated or been overstated.
This fall, investors were killing pennies in almost every sector. The question is, which penny stocks have undergone a justified correction, and which have resulted from a mistaken, emotional overreaction?
Here are some penny stocks that you may be familiar with. While their stock prices fell last fall, these are financially stable companies that have become a side damage hampered by gloomy market sentiment. And, unlike most penny stocks, their stock prices are bouncing.
Accelrys Inc. (Nasdaq – ACCL) is a profitable, financially sound company with more than $ 53 million in cash, a strong international presence and no long-term debt. Since the beginning of March, the share price of ACCL has risen by 28.57%.
In early February, ACCL announced that third-quarter revenue was up 5% year-over-year to $ 20.6 million. Net income for the period was $ 1.01 million, or $ 0.04 per share, compared to (loss) ($ 1.23 million) or ($ 0.05) per share for the same period last year.
California microdevices (Nasdaq – CAMD) is an innovative company with more than $ 48 million in cash, no long-term debt and good long-term growth potential. Since the beginning of March, the share price of CAMD has risen by 39.56%.
In late January, CAMD announced that the results of the third quarter of fiscal 2009 (ended December 31, 2008) were in line with revised instructions of $ 9.7 million. While demand for the company’s products has plummeted due to the weakening global economy, the company’s strong balance sheet will help it withstand the current economic storm. CAMD expects the current stock adjustment to be completed by mid-2009.
Art Technology Group, Inc. (Nasdaq – ARTG) is a profitable, financially sound company with more than $ 59 million in cash, no long-term debt and improved operations. In early March, ARTG traded for just $ 1.95, and this week reached a high of $ 2.96 per day; for a short-term spread of 51.79%.
In March, ARTG announced the conclusion of two strategic partnerships. In early February, the company announced that revenue in the fourth quarter was up 16% year-over-year to $ 45.4 million. Net income rose significantly to $ 3.5 million. Revenue for the full year grew by 20% to $ 164.6 million. The company also achieved a full-year profitability of $ 3.8 million.
If the recent rise with small capitalizations and penny stocks is viewed through the prism of recent history, then we could all expect markets to roll back significantly. As the last 18 months have been far from typical, it is difficult to articulate the optimism of some markets.
It’s possible that some penny stocks are going back to where they were last fall – before emotions were heard and they fell off the table. And it still gives shrewd penny investors room to maneuver before a real market boom begins.