Local Penny Stocks Rise With Market, But Doubts Persist
By KATE BERRY
Several of L.A.’s biggest stock-market disasters are getting a second wind in the market’s recent rebound.
Fallen names like Capstone Turbine Corp., Gemstar-TV Guide International Inc., Homestore Inc. and Vans Inc. have all hit near-term highs in the past few weeks following a national trend that shows penny stocks coming back into favor.
“The thesis is, if the economy is really getting better, then a rising tide will raise all ships,” said Steven Schuster, portfolio manager at Cramer Rosenthal McGlynn, a value manager in New York.
He advises caution, noting that there’s no real evidence that the economy is improving enough to prop up companies with rickety balance sheets.
What’s more, recent stock market rallies are inviting speculation. Since the beginning of the year, the S & P; 500 was up 5 percent and the Nasdaq composite, which is weighted with technology stocks, is up 11.6 percent through May 21. Much of the gains have come in the past two months.
While no one predicts a technology boom similar to the late 1990s, a handful of market watchers believe speculators are pumping up the value of penny stocks that is, companies whose shares trade below $5 a share.
“While you might find some spectacular winners in stocks under $5, most of the time those types of names are fairly inferior products,” Ken Tyszko, who helps oversee $20 billion at Voyageur Asset Management in Chicago, told Bloomberg News.
Money managers such as Scott Vergin, of Thrivent Financial For Lutherans, are willing to own sub-$5 stocks because they can benefit from price swings. Vergin said he bought Lucent’s stock in the low-$1 range, sold it at $2, and then bought more shares. The stock has traded as high as $4.10 and as low as 55 cents during the past 12 months.
Small companies make up the majority of names in the LABJ 200 Index, which is up 14.4 percent year to date. Of the index’s members, 81 trade under $5, including insurer Unico American Corp., Internet players Valueclick Inc. and Youbet.com Inc., fitness company Sports Club Inc. and lender Aames Financial Corp. All have posted significant stock gains this year.
Nevertheless, many money managers won’t touch companies whose stocks trade for under $5. Fully 40 percent of stocks under that level continue falling below $1 or cease to exist, said William Sprague, a managing director at Crest Advisors, which advises companies on financing options. Data from Crest shows 90 percent of stocks that fall below $5 a share never make it back up above $10 again.
That hasn’t stopped national flameouts such as Sun Microsystems Inc., Lucent Technologies Inc. and Dynegy Inc. from getting attention in recent weeks.
Locally, one of the most dramatic run-ups comes from Capstone Turbine, the Chatsworth-based alternative energy company whose shares once traded near $100 each. Over a three-week period through last week, Capstone’s stock had risen 50 percent, to $1.20 a share. Rumors have been circulating among traders that General Electric Co. could be interested in taking over Capstone. The company makes on-premises turbines that generate electricity using natural gas.
Spokesman Wayne Welch said “there’s nothing that we can attribute” to the stock’s rise and noted that the company doesn’t respond to market rumors.
He noted that stocks in the alternative energy sector have come back onto traders’ radar screens after falling out of favor in the wake of California’s energy crisis. Another such stock is Active Power Inc. of Austin, Texas, up 33 percent for the month through May 21, to $1.78 a share.
Another fallen angel is Gemstar, Pasadena-based owner of TV Guide and onscreen television guides whose aggressive accounting methods resulted in a restatement of large chunks of revenues and a Securities and Exchange Commission investigation.
Earlier this month a federal judge ordered Gemstar to withhold $38 million in severance pay to Henry Yuen, the company’s former chairman and chief executive, and Elsie Leung, its former chief financial officer.
With a new team in place led by Chief Executive Jeff Shell, Gemstar is making significant changes, trying to repair damaged relations with some of its cable-industry customers and focusing attention on the ailing TV Guide magazine.
The stock got a boost when Shell projected that the advertising climate for TV Guide would pick up in the first quarter of next year. In the past three months, shares of Gemstar have risen 39 percent, to $3.97 on May 21. The stock traded as high as $100 a share in March 2000.
“Some of these companies are simply going from death’s door to survival,” said Schuster, of Cramer Rosenthal. “But it’s like with all things, irrational behavior can last for an extended period of time, which we saw in the late 1990s with the bubble.”
Another firm in turnaround mode after a scandal is Homestore, whose shares have more than doubled since mid-April.
After announcing a deal on May 14 to provide online home listings to Earthlink Inc., Homestore’s stock hit $1.47 a share. Shares have pulled back, along with the general market, to $1.17 on May 21, but are still up 120 percent in the past two months, from 53 cents on April 15.
The company is still reeling from a scheme in 2001 by four Homestore executives to overstate its advertising revenues for the online real estate firm. The former executives pleaded guilty to securities fraud charges after allegedly arranging illegal deals to falsely boost advertising revenues.
Meanwhile, Vans Inc., the skateboarding shoe and apparel company that ran into trouble with a strategy of building skate parks, is trying to stage a turnaround after several disappointing quarters.
“They’ve had a lot of earnings misses and decelerating sales,” said Michael Pachter, an analyst at Wedbush Morgan Securities in Los Angeles.
Vans shares have risen 72 percent in the past two months to $6.14 a share, up from a low this year of $3.57 on March 14.
Gary Schoenfeld, Vans’ president and chief executive, said early this month that he was “encouraged” by a recent improvement in same-store sales trends during the previous two months.
Despite the recent rises, Vans shares are still well below their 52-week high of $12.76 at the close on May 17, 2002.
Bloomberg News contributed to this story