If you love penny stocks (and judging by the number of big-hit stocks that have slipped into the penny stock range in the last 18 months…there are plenty of you), then the last month has been one of the best optimism or great pessimism.
From March 9 to April 9, the Dow Jones Industrial Average gained 23%, the S&P 500 rose 26%, and the Nasdaq Composite rose 30%. Small-cap stocks significantly outperformed large-cap stocks, with the Russell 2000 Index rising 36% in the same period. According to S&P’s Howard Silverblatt, this was the biggest 23-day advance since 1933.
The recent appreciation in US stock prices prompted one investment officer to say the rally is “too explosive to be sustainable”. According to Birinyi Associates, when small-cap stocks outperform large-cap stocks to this extent after bear markets, rallies fade.
Will history repeat itself? Or will penny and small cap stocks continue to trend higher?
According to an article I was reading (and no doubt there are ten times as many pointing to the contrary), pessimistic views seem to rest on one main assumption: that history is a good guide to the future.
And many times it is. Except in those cases where history has little or nothing to offer for comparative analysis. While we have all lived to tell the story of previous bear markets, it has been a while since we have seen anything like it in the last year or so.
In fact, it has probably been a century since the economy experienced a sharp drop in the velocity of money as it did last year. Not since 1907 has the US economy experienced a true panic like it did in late 2008.
Larry Summers, President Obama’s top economic adviser, said the economy behaved like a ball falling off the edge of a table in late 2008. Nearly all major economic data, the article noted, resembles the front half of a “V”. starting around September.
Vehicle sales fell to a level well below the scrapping rate, while home starts fell to just a third of the volume needed to keep up with fundamentals such as population growth. The combination of a rapid decline in economic activity, rising foreclosures and mortgage defaults, as well as mark-to-market accounting led to huge losses at banks and panic selling of stocks.
If you believe some financial analysts, the economy and the market are recovering from the historically rare events of the past year.
If this is the case, and most stocks are down and trading at what appear to be bargain prices, how can we separate penny stocks from irritation? After all, even excellent penny stocks saw investors overreact, sending their share prices off the table. But which penny stocks are going to bounce…and which ones are going to fall deservedly?
During a normal bear run, markets will correctly anticipate the value of many stocks and discount them accordingly. A 50% drop in price is certainly a markdown, but it’s not a bargain if the company’s value has halved, it has deteriorating business units, or it was overvalued to begin with.
Last fall, investors sold penny stocks in virtually every sector. The question is, which penny stocks went through a justifiable correction, and which were the result of a misguided and overreacted emotional reaction?
Here are some penny stocks you may be familiar with. While their share prices fell on the table last fall, they are financially sound companies that became collateral damage, overwhelmed by gloomy market sentiment. And, unlike most penny stocks, its share prices are bouncing.
Accelrys Inc. (Nasdaq – ACCL) is a profitable and financially strong company with more than $53 million in cash, a strong international presence and no long-term debt. Since the beginning of March, ACCL’s share price has risen 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 a (loss) of ($1.23 million), or $(0.05) per share in the same period of the year previous.
California Micro Devices (Nasdaq – CAMD) is an innovative company with over $48 million in cash, no long-term debt, and good long-term growth potential. Since the beginning of March, CAMD’s share price has risen 39.56%.
In late January, CAMD announced that results for the third quarter of fiscal 2009 (ended December 31, 2008) met revised guidance of $9.7 million. While demand for the company’s products has dropped sharply due to a weakening global economy, the company’s strong balance sheet will help it weather the current economic storm. CAMD expects the current inventory correction to be completed by mid-2009.
art technology group, inc. (Nasdaq – ARTG) is a profitable and financially strong company with over $59 million in cash, no long-term debt, and improved operations. In early March, ARTG was trading as low as $1.95 and this week hit an intraday high of $2.96; for a short-term spread of 51.79%.
In March, ARTG announced that it had formed two strategic partnerships. In early February, the company announced that fourth-quarter revenue was up 16% year over year to $45.4 million. Net income increased significantly to $3.5 million. Full-year revenue increased 20% to $164.6 million. The company also posted an annual return of $3.8 million.
If the recent rally in small-cap and penny stocks is viewed through the lens of recent history, then we could all expect the markets to pull back significantly. Given that the last 18 months have been anything but typical, it is difficult to frame some of the current optimism in the markets.
It is quite possible that some penny stocks are trending back to where they were last fall, before emotions kicked in and they fell off the table. And that still gives astute penny stock investors room to maneuver before the real market rally begins.