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This is the first in what I hope will become a series of posts on the editorial process at Seeking Alpha - the opportunities, challenges and questions we confront on a daily basis. I hope this becomes interactive in comments, with my post just the beginning of the conversation.
• • •
Are penny stocks still the primary domain of pump-and-dumpers and stock spammers? You know what I'm talking about:
We've had a longstanding, blanket policy at Seeking Alpha not to publish articles that focus on stocks trading under $1. The reason: Our primary editorial goal in our opinion and analysis section is to bring readers insightful writeups from hundreds of serious investors and sector experts, while filtering out (1) the junk and non-market content that gets through automated aggregators, and (2) charlatans who attempt to manipulate stock prices by spreading misinformation.
Our $1 rule has been a simple and effective way to block the overwhelming majority of the bad guys, who require thinly-traded stocks to perform their dirty deed. While there have always been legitimate writers and investors in microcap and smallcap equities (Microcap Speculator comes immediately to mind), our rule required us to exclude these authors when they addressed penny stocks, to maintain a broader community of credible authors.
And then the market collapsed.
We're now facing a situation where four US-traded stocks with market caps over $500 million trade under $1: Fannie Mae, Freddie Mac, Level 3 and Sirius XM. If you pull that market cap figure back to $250 million, the number jumps to ten, and includes household names and popular portfolio holdings such as Rite Aid (RAD).
The sheer volume of stocks that recently fell under this threshold drove the Nasdaq to suspend its own delisting rule that previously banished stocks trading below $1 for more than 30 days to the over-the-counter exchanges:
By Nasdaq's count, the number of securities trading below $1 on the exchange rose from 64 to 227 in the 12-month period that ended Sept. 30. By Oct. 9, the number had risen to 344. In addition, another 300 Nasdaq-listed securities were trading between $1 and $2.
(The NYSE is still freezing trading in these stocks and then delisting - Thornburg Mortgage got this treatment today.)
Given this novel situation, our editorial team has been reassessing our rule and at times bending it. The risk of manipulation seems much lower on a stock like SIRI that has daily turnover of 50 million+ shares. So when we know and trust the author, we have been publishing on Sirius XM and the financials that dropped under a buck.
This applies to microcaps as well. We recently ran an article by longtime SA contributor Asif Suria on a portfolio holding of his that he finds to be trading below book value - at 73 cents. It's a solid writeup, and since we trust Asif fully, we wanted to make it available to our readers.
So while we're as diligent as ever in rejecting submissions that smell even faintly of stock manipulation (in any case, we accept only about 25% of submissions from new authors), we've opened the doors to trusted SA contributors who address penny stocks as investment opportunities in these extraordinary times.
What are your thoughts? Have we done the right thing, or should we have maintained the firm rule in any case?
Update 12/8/08: A case for the Nasdaq to eliminate its $1 rule entirely.
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This article has 40 comments:
Keep going.
Ken
Thanks,
Joe Smejkal
Omaha, Nebraska
So why not make exceptions from your current rule based on one or more of the following:
1. Market cap.
2. Volume.
3. Average price over the past year or two. (If well over $1).
I think your article selection is excellent and that includes under a dollar stocks. I appreciate your diligence.
zag
Within six months, you wil be able to once again resume your previous standards bar...almost by defacto. These companies to which you refer will not be under a buck then...one way or another.
Appreciate your site and contents...
I follow specialty retail closely, especially apparel, and a number of companies have seen their shares drop below $1 or threateningly close: CHRS Charming Shoppes (Lane Bryant, Fashion Bug, Catherine's)), NWY (New York & Co.), CMRG (Casual Male XL, the only large chain for the "big and tall"), CWTR (Coldwater Creek), PSUN (Pacific Sunwear) $1.01, EBHI (Eddie Bauer) and FOH (Federick's of Hollywood) for example, in the apparel group and HMX and ZQK basically in wholesale.
Elsewhere, in addition to RAD, I see ACMR, BONT, GMTN, PIR, RVI, SPCHA/ SPCHB and TUES.
I don't mean to say these are or were big caps. Simply that lumping them in with the hundreds of "get rich quick" solicitations I and others receive every year (I just threw out a stack nearly four-feet high, abandoning my idea of finding an enterprising business reporter who would like to look into the several "middle man" companies that engineer these promotions) is kind of reckless.
Perhaps you don't have software programs that could sort other than by price. If so, so be it.
Appreciate your asking for input.
Likewise, legitimate companies do not change in nature when the stock market panics.
How about a minimum trailing volume criteria? That leaves much of the market and perhaps some great ideas unexamined, but avoids the possibility that SA could be used as a vehicle for pump & dump fraud.
Is there no way you can separate the penny stock wheat from chaff? Perhaps solicit reviewers the way you presently solicit writers? There have to be ways. This is more than just a convenience issue for amateur investors like me. Properly managed the OTC and PK could be a viable means for small, SMALL new businesses to become and stay liquid during their developement phase. The rampant presense of thieves and con men has largely prevented that from happening so far. We should not leave this potentially lucrative and productive investment avenue to them.
The penny stock rule is definitely a solid idea, it just requires interpretation to differentiate the legitimate companies from the things being pushed by the ad you cite in the opening.
maybe do it by market cap rather than share price?
Interestingly that would disqualify my article about Towerstream but would introduce a consistent policy that your audience and contributors can look forward to.
On Dec 03 10:20 AM Movingonup wrote:
> It seems that with the downfall of almost every (real) company, that
> penny stocks can be a safer, and wiser choice at this time. With
> the recent news of a likely Federal funding for stem cell research,
> I see many chances of oppritunity. STEM, SCLL, PSTI, BCLI, ASTM,
> CCEL, and even PIP, and RGN. I have played here for some time now,
> and these stocks usually aren't effected much when the major company's
> are on a roller coaster. Safer, and cheaper, and the right time for
> something to happen. I think you have started something we would
> all like to hear more about, besides, pretty soon, they may all be
> penny stocks.
I would actually add volume and fundamentals restrictions.
SIRI should be the only exception, as it is highly liquid.
This kind of recovery is not without precedence. Recall that Chrysler went from $2 to over $30 in the 1982-3 recovery. Magna International went from under $2 to over $80 in 1990-2.
CHIP Verichip in the know. "David Icke."
1- In November 2008, former Chairman and Chief Executive Officer, Scott Silverman, purchased 5.4 million shares of VeriChip common stock from Digital Angel.
2- At this time, CHIP is focused on rebuilding the VeriMed Health Link business, specifically ensuring that their relationships with advocacy groups, hospitals and physicians are maintained. The next step is reigniting their marketing efforts in their core geographies, which will require the addition of medical sales representatives. Furthermore, CHIP will continue the development of the glucose-sensing microchip in conjunction with RECEPTORS LLC, for which they provided an update of Phase I development results several weeks back.
3- CHIP is selling their products via Microsoft's "health website."
4- David Icke* discusses CHIP and the near future of what is coming with their products which will be GOVENMENT MANDATORY mind you.
1- www.youtube.com/watch?...
2- www.youtube.com/watch?...
3- www.youtube.com/watch?...
4- www.youtube.com/watch?...
5- www.youtube.com/watch?...
6- www.youtube.com/watch?...
7- www.youtube.com/watch?...
CHIP is a sleeping giant if you are honest with yourself.
Take care and best wishes,
Catherine AZ
Keep on Trading
Peusodo Trader!
In some ways I'm very conservative, I have to be in my industry, but personally speaking, I recently subscribed to a newsletter, I don't know their readership, but they were pumping out some solid advice. And at least on one occasion, I can't speak for all of them, I jumped on, rode a wild horse of a penny pick, and came out on the other side with money in my pocket. And, at least in term of penny stocks, that's well worth the risk and being diversified is always a good thing.
Here's the site...
whisperfromwallstreet.com
My advice re: pennies, join a few newsletters, then do some paper trading, then never, never, never put all your eggs in one basket.
Caught this a little late, hence my late commetary.
"What do you mean, gone down?" you might ask. As I recall, for several months that I began to take nibbles, this stock was at trading at approximately .13-.20/share. It was coming down from around .35/share. As I recall, it had hit around .35/share in 2006 after CEO Janes had made a presentation of his product to small cap investors in NYC. He also had gotten a nice write up in a magazine as a stock to watch. As you can imagine, CEO Dean Janes told me that since that event he was upset that the share price had continued to go down -- even though he was doing everything he reasonably could and should be doing to advance his company and product.
Since I had approached him as an investor, he asked me how I could explain why several "hot" companies were trading at $1 or more per share and they did not even have a physical warehouse or headquarters - which I could see that IMGG had. I agreed that it did not make sense that the share price of IMGG was going down from .35/share and not up.
CEO Dean Janes and I did disagree on two things though: in 2006, he sincerely believed that his company would likely be getting FDA approval by the end of 2007. Then he believed investors would flock to his company and GE, Siemens, or some other Buyoutco would probably make him seem crazy not to sell his device. He was thinking that even if IMGG sold the device, IMGG might still have a huge profitable operation going by continuing to develop, upgrade, and repair it.
I told him that I did not believe 2007 would be his year. I thought it would take until at least 2008. I must admit, when 2008 came and the entire stock market seemed upside down, I realized that IMGG might not have the great year that I thought it would in 2008.
However, IMGG is a company that has weathered a severe fire and other set-backs. So when a family member (whom I had advised to buy IMGG in 2006) asked whether he should sell, I said hell NO! I pointed out that to IMGG this storm was business as usual. To GE, this storm was far more life threatening.
Now IMGG's stock has "rushed" up to .24/share. According to yahoo (as of 091509) IMGG has a $63.73M market cap. However, I have seen their warehouse. It is a relatively NEW building. When I visited, it had a LOT of empty space (even though they were using some space for C-arm re-manufacturing).
My argument with CEO Janes was that they should manufacture the Dominion device themselves. At that time he did not like that idea as much because GE could bring a lot of cash to the manufacturing operation that IMGG did not have. - But that was 3 years ago. Now it is not clear to me whether GE, Siemens or any of the potential suitors Janes thought might arrive are in any position to be buying anything.
Furthermore, the Dominion device is not that big. It did not, for example take up much space inside their facility. Plus, for each one of these devices they are able to make and sell, it is my understanding that they would generate approximately $500k in revenue. I do not know how much of that would be profit, but I would imagine that with each device produced, they could make it cheaper and cheaper.
I could be wrong, (I have not had time to keep on on the latest press releases and would look forward to hearing from someone who has) but it seems like the company might now be leaning towards manufacturing Dominions themselves. This is because if they have "luminary sites," then they can force potential buyers to go visit the device, see it in operation, and either special order it, or NOT. This almost eliminates the need for a big marketing team. Instead, IMGG should have someone who simply books orders for the device. Better too many orders than too few orders and lots of extra devices sitting around unsold.
Again, I would argue that although Janes himself may be tired and in need of cash and/or retirement (after all he has dedicated a significant part of his life to the Dominion), but IMGG does not need a buyout as much as it needs buyers. When I say buyers, I do not mean buyers at .35 or even $1/share. I mean buyers of the device. Also, buyers of the software to run it and upgrade it. Also, buyers of the service technicians and parts to fix it.
In the meantime, because this company has a new product which offers better and cheaper images than regular X-ray machines, a driven CEO/founder, no direct competitors, and has the ability to manufacture its own product, software and related components, I think that even .35/share it would be undervalued - especially if the FDA approves its product. So, if you are holding it, I would say be patient. Short term traders may be wise to exit at .35/share. So perhaps there will be a dip for awhile after it hits that. But longer term this could be $1/share stock, and longer term this could be worth far more.