Saturday, July 08, 2000

Sophisticated Investor


Some little gems among low-priced stocks

By John Waggoner
USA Today

        So you spent most of your Fourth of July cooking hot dogs, watching fireworks and listening to your neighbors talk about their stocks. And talk. And talk.

        You know there's only one thing that stands between you and stock ownership: money. At $135 a share, you'd need to fork over $13,500 for 100 shares of Intel. And if you had that much kicking around in your bank account, you'd buy a new car.

        But don't count yourself out of the stock market en tirely.

        If you have the time and patience, you can try investing in small-company stocks, whose share prices aren't quite as daunting as behemoths such as Intel. And if you're utterly broke, you can start investing in individual stocks or mutual funds for as little as $50 a month. You couldn't even buy a motor scooter for that.

        If you're adventurous, consider investing in low-priced stocks — those with prices at $5 to $20 a share. If you're buying in 100-share lots, you'll spend $500 to $2,000.

        At least in theory, low-priced stocks can offer big rewards. After all, even Microsoft was small once.

        In reality, most stocks selling at $5 to $20 a share are low-priced for a reason, usually not a good one. The company may have posted disappointing earnings, for example, or missed a product deadline.

        But for stock-pickers such as John Rogers of the Ariel funds, those missteps are opportunities to buy good stocks at bargain prices. “Lots of companies are cheap now,” he said. And that means many are takeover candidates, too.

        In October, we asked Mr. Rogers and four money managers to pick three low-priced stocks that they liked. Some fared spectacularly. Adept Technology, for example, is up 578 percent since Oct. 29. Hall Kinion & Associates is up 148 percent.

        Two have been taken over. General Electric bought Mecon in Feb ruary for $10.78 a share. And Hussman International was purchased by Ingersoll-Rand in June for $29 a share.

        That's the good news.

        In the worst case, there's Steven Madden, whose founder was indicted on 17 counts of stock fraud and conspiracy in June. The stock has tumbled 44 percent since October.

        “We sold it at the first sign of trouble,” said Erin Piner, manager of PBHG Limited. “He's the vision and the designer for the company.”

        And that's the problem with low-priced stocks. They can be very good and very bad.

        If you do buy low-priced stock:

        • Look for a strong balance sheet: low debt, decent earnings.

        • Find out why it's cheap and why it should rise. Cheap stocks can stay cheap for a long time.

        If small stocks are just too scary, try bigger stocks. Brokerages used to charge extra if you bought fewer than 100 shares at a clip. Now, most charge the same price for 10 shares as for 100, according to John Markese, president of the American Association of Individual Investors.

        And some Internet brokerages will help you build up small positions at low cost.

        For example, sharebuilder.com charges $2 a transaction in about 2,000 stocks. There's no minimum investment. Buyandhold.com will let you buy as little as $20 of stock for $2.99 a order.

        Be aware that investing in large companies is no guarantee against losses. Microsoft, for example, is down 15.2 percent since Oct. 29.

        Finally, there are mutual funds. Funds were designed for small investors. Annoyingly, many funds have raised their minimums to $3,000 or more.

        Fortunately, several fund groups have automatic investment plans, which let you start a mutual fund account for as little as $50. You agree to let the fund tap your bank account electronically once a month for an amount you choose. You have to keep saving until you reach the fund's usual minimum investment.

        Strong Growth, for example, will let you open a regular account for $2,500.

        But if you agree to an automatic investment plan, you can open an account for $50 a month.

       



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