Commentary: Dance of the penny shares
Cheap media stocks are volatile, but they can pay offDaredevil investors are finding big money in cheap media stocks.
Sirius XM Radio is the most obvious example of how penny-pinching can make for big gains. Fast traders could have had the stock for a nickel Feb. 9; it closed Tuesday at 34 cents, a 580% gain in 41 trading days.
Of the stocks that make up The Hollywood Reporter Showbiz 50 index, Sirius XM has bounced highest off its 52-week low. But it isn't the only example of a stock that has achieved 10 years worth of gains in a matter of weeks. Another is Blockbuster, which briefly traded at 13 cents March 3 and closed Tuesday at 78 cents, good for a 500% windfall in 26 trading days.
Those speedy gains have come courtesy of bankruptcy worries. But other low-priced media stocks that have skidded to their lows recently -- then quickly bounced back -- did so with slightly less scary headlines, and fast-moving traders have capitalized.
Cumulus Media, a player in the much-maligned traditional radio industry, traded for 33 cents in November and closed Tuesday at $1.05, a 218% increase in less than five months. A competitor, Citadel Broadcasting -- no longer a Showbiz 50 member since being delisted from the New York Stock Exchange on March 5 and moving to the OTC Market -- has risen from a penny to 6 cents, a 500% gain in 24 trading days.
Another Showbiz 50 example is Hearst-Argyle TV, which, like Blockbuster, hit its 52-week low March 3. But the stock has gone from $1.38 then to $4.24 on Tuesday for a 207% rise in 26 trading days.
It looks so easy: Wait for panic to drive shares of embattled companies into penny-stock status, swoop in, then sell the shares a few months later for massive gains.
Just don't expect many experts to condone such behavior.
"It's gravity," Motley Fool senior analyst Rick Munarriz says. "When the market goes lower, the first things traders will dump are Sirius, Blockbuster, Cumulus and the others like them."
Timing is everything when buying cheap stocks of heavily indebted companies. "The pessimism is so baked into these that a whiff of good news sends 'em soaring," Munarriz says.
If the good news never comes, though, shareholders could be wiped out, like the ones who bought stock in WorldSpace, a company trying to be an international version of Sirius XM.
Even if the good news does come and profit from these trades is astronomical, there's a danger in assuming that successes can be duplicated easily. "The only thing to take from it is that penny stocks are volatile," Munarriz says.
The key to investing in stocks that have been beaten down more than 90% from their highs is to pick ones with at least semi-clean balance sheets. That can be tough.
"In media, most of the stocks trading at less than $2 are there because of too much debt," says Northlake Capital Management's Steve Birenberg, also the media and communications blogger at SNL Kagan. "They are walking bankrupt."
Birenberg predicts "a lot more bankruptcies" among media companies with big debt and tiny stock prices, "especially for companies that don't have rich parents, unlike Cox Radio and Hearst-Argyle TV."
Cox Enterprises is attempting to buy the interest in Cox Radio it does not already own for $3.80 a share, 31% more than the stock's 52-week low of $2.90 reached March 11. Wall Street expects the offer to climb, and Cox Radio shares closed Tuesday at $4.04.
Likewise, Hearst Corp. wants to buy the portion of Hearst-Argyle TV it doesn't own for $4 a share, but the stock closed at $4.23 on Tuesday, 207% higher than its $1.38 low March 3.
Birenberg says he's waiting for the radio industry to restructure -- including every company going bankrupt -- then invest in the ones with strong free cash flow.
He also likes another high-flying cheapie: Carmike Cinemas, which hit a low of a dollar March 9 and closed Tuesday at $3.44 for a 244% gain in just 22 trading days.
"The movie biz is on fire so far this year and stocks have rallied sharply," Birenberg says. Not only that, billionaire Mark Cuban bought 9.4% of the company in January for about $2.8 million, which could create a takeover scenario.
Sometimes, Munarriz says, the best opportunities arise just before big debt payments come due, when word is leaked that bankruptcy is being considered. "Companies will scare creditors to the table but also scare shareholders into selling," he says.
Sounds like the type of scenario that leads to a stock like Sirius XM selling for a nickel or Blockbuster for 13 cents.