After Blue Chips Fall, Some Pick Up Pennies

Say this much for America’s embattled corporate executives: They have managed to resurrect the public’s interest in penny stocks.

Securities regulators fought a hard campaign in the 1990s to turn people away from the market for penny stocks, a term that generally refers to shares trading for less than $5. Regulators argued that the stocks were too risky for most people and were highly vulnerable to manipulation by crooked traders.

But that was when the boilerplate language used to describe companies trading on the over-the-counter Bulletin Board and in the so-called Pink Sheets was that they were “the smallest and most speculative firms.”

These days, only one of those descriptions can be used as a generalization for companies in those markets. They’re still speculative, for sure. But the Bulletin Board and the Pink Sheets have become home to such onetime titans as Enron, Global Crossing, Adelphia Communications and Bethlehem Steel, among others that have been managed into Bankruptcy Court in recent months.

Meanwhile, still listed on the New York Stock Exchange but trading for less than the price of a bad cup of coffee at some restaurants are companies such as Lucent Technologies, Nortel Networks and Qwest Communications.

Many individual investors might well prefer to ignore these stocks, but they can’t--because they’ve held them straight through the devastating declines to pocket-change prices. “Buy and hold” proved to be a very bad concept with far too many tech and telecom issues.

For other investors, the interest in the new class of penny-priced shares is less about where they’ve been than where they may be going, price-wise.

Case in point: The action in shares of WorldCom last week was a speculator’s dream. When the telecom giant’s stock resumed trading Monday after a three-session halt related to its revelation of $3.9 billion in apparent book-cooking, the price dived from 83 cents to 6 cents on record trading volume of 1.5 billion shares.

But after WorldCom Chief Executive John W. Sidgmore on Tuesday declared that the company is too big and important to fail, some investors who had been expecting a bankruptcy filing recanted that view. At 6 cents, or even 10 cents a share, WorldCom appeared too tantalizing to pass up.

By Friday, the price had rebounded to 25 cents a share on Nasdaq, as trading volume remained massive. For a speculator who was filling bushel baskets with the stock Monday at 6 cents, the paper gain in four days was a spectacular 317%.

Some of that bargain-hunting fever infected the broader market Friday. Key stock indexes soared in the half-day session, with the Dow Jones industrial average zooming 324.53 points, or 3.6%, to 9,379.50, its highest since June 20.

The Standard & Poor’s 500 index and the Nasdaq composite, which earlier in the week hit their lowest levels in at least 4 1/2 years, jumped 3.7% and 4.9% Friday, respectively, though both still lost ground for the week.

What did investors see that suddenly made stocks appealing? The Fourth of July holiday had passed without a major terrorist attack, save for the tragedy at Los Angeles International Airport, so the sheer relief factor was high. Also, many upcoming second-quarter corporate profit statements are expected to show renewed growth.

But the government’s report Friday of June employment trends showed a smaller-than-expected gain in jobs, suggesting that the economic recovery is slowing.

It’s entirely possible that Friday’s market surge had less to do with the fundamentals than with technical factors. Stocks had been falling for most of the previous six weeks. In the parlance of market technicians, Wall Street had become “oversold” and was due for some kind of bounce.

Many short-term traders are happy to play either side of the net--a sharp rally in stocks, or a steep decline. They just need movement to make a quick buck.

But that isn’t a prescription for a new, sustained bull market. For that, Wall Street needs investors who think they can trust corporate financial data and who don’t live in fear that their favorite CEO has a date with federal prosecutors.

Investors who have little faith in the long-term prospects of companies, or in the accuracy of corporate reporting, may figure there is no material difference between cheesy penny stocks and those that purport to be blue-chip shares. There certainly hasn’t been much difference in the case of the Lucents, the Qwests and the Enrons.

With that attitude, and with the potential to triple your money in a penny stock in a week (a la WorldCom) if you get lucky, the allure of the penny-stock arena may become overpowering for some individuals. If investing is just gambling anyway, why not gamble for the big percentage win?

It has happened before: In the early 1980s, the public was generally uninterested in equities after years of miserable performance but became fascinated with the penny stocks of fledgling oil companies amid predictions of $100-a-barrel oil. That penny stock boom ended badly, as they all do. But for thousands of people, it was fun, and profitable, while it lasted.

It’s a sad commentary, but when was the last time people used the words “fun” and “profitable” in a sentence involving big-name stock investing?

*

Tom Petruno can be reached at [email protected]. For recent columns on the Web, go to: www.latimes.com/petruno.