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From $2 to $10? Dream on
Investors have flocked to tech stocks trading below $5. But are they good long-term bets?
May 22, 2003: 2:39 PM EDT
By Paul R. La Monica, CNN/Money Senior Writer

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NEW YORK (CNN/Money) - Who said one was the loneliest number? (Besides Three Dog Night, of course.)

Investors have embraced many tech stocks trading in the single digits. And many stocks under $5 (usually considered the minimum price to attract the interest of major institutional investors) have soared.

Several techs under $5 are familiar names, stocks that were the proverbial "highfliers" of the late 1990s and early 2000. JDS Uniphase, trading at $3.25, has surged 31 percent. Sun Microsystems, at $4.20, is up 35 percent year-to-date. Lucent and Nortel are each up more than 80 percent.

And remember when B2B e-commerce companies like Ariba and Vignette were all the rage? They are again. Ariba has shot up 37.5 percent while Vignette is up a stunning 77 percent.

Less than a Lincoln
The top ten performing tech stocks trading below $5 a share.
CompanyPriceYTD change
Sonus Networks$3.97297.0%
Zarlink Semiconductor$4.78111.5%
Enterasys Networks$3.17103.2%
Cable & Wireless$4.71102.1%
Conexant Systems$3.1796.9%
Lucent Technologies$2.4695.2%
Vitesse Semiconductor$4.1690.5%
Nortel Networks$2.9683.9%
Vignette$2.1877.7%
CNET Networks$4.3159.0%
* Minimum market cap of $500 million. Prices as of 5/22/03
Source:Thomson/Baseline

But investors buying these stocks with hopes that they will return to their former highs might want to consider some sobering statistics from a recent study done by boutique investment bank Crest Advisors.

Odds are, techs trading in the low single digits won't get anywhere close to their all-time peaks.

Crest looked at 5,800 companies from 1992 through 2002 and found that only 16 percent of stocks trading between $3 and $5 ever wound up trading above $10. For stocks trading between $1 and $3, that percentage slips to 9 percent. And for penny stocks, companies trading below a buck, only 3 percent made it to double digits.

"We're talking about companies that have gotten here because of bad decisions or bad things happening in their industry," said Bill Sprague, a managing director with Crest Advisors.

Of course, if this tech rally is for real, these stocks will probably continue to rise. And large companies like Lucent and Sun Microsystems are not your typical low-priced stocks since they continue to have high institutional ownership, a relatively large market valuation and decent balance sheets. So they have a much stronger chance of getting back to $10 eventually, he said.

But for every Lucent and Sun there are companies like Zarlink Semiconductor and Enterasys Networks, small-caps that have more than doubled even though they are expected to lose money this year. This reeks of the speculative excess of the late 1990s that got so many techs in trouble in the first place.

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To be sure, there may be decent money to be made in a short-term trading strategy with low-priced stocks.

In fact, I wrote a column in early March saying that Gateway, then at $2.24 a share, was slightly undervalued because its market value was lower than the amount of cash the company had.

The stock now trades at $2.94, a 31 percent gain. But I didn't think then and I don't think now that Gateway is a great long-term investment since it remains a distant third in the U.S PC industry behind Dell and HP and is expected to lose money this year and in 2004.

That's why investors should embrace these single digit stocks at their own peril. A stock can go from $2 to $4 pretty easily on nothing more than momentum. To keep rising, get over the $10 hump and stay there, it usually means that the fundamentals have to get better too.

That's the hard part.


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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.