What’s so meaningful about under $5 anyway?
99% of the time, professional money managers will not even look at a stock priced under $5. Not even for a quick peek.
Their decision has nothing to do with the underlying company; it has everything to do with the regulatory risk assumed by the manager when speculating on low-priced securities.
Professionals are risking more than loss of money when they venture into the sea of penny stocks. If they are wrong, they could find themselves at the end of a regulatory hook!
As a result of this regulatory risk, the vast majority of professionals and their clients will never catch a multi- multi-bagger.
For some reason, novice speculators seem to be attracted to penny stocks. Similar to the way a barracuda is attracted to a shiny lure that swims passed its mouth on a sunny day.
In all seriousness… 99% of the stocks priced under $5 are shiny lures and should not be eaten.
No matter how hungry a barracuda may be, it better develop the ability to decipher between a real fish and a shiny lure—or it’ll end up with a treble hook in the mouth.
Ever notice how a shark often bumps its prey or gives it a nibble first?
Moral of the Story: in order to be a big-fish someday, one must not aggressively bite into all objects that look like an easy meal.
I strongly recommend using a “Less Than 1% Rule” when dealing with stocks priced below $5. That is, for every 100 stocks researched, you should not bite into more than 1 of them.
I Think These 2 Stocks Could Be 1% ers’:
1) McEwen Mining Inc (NYSE:MUX) is producing gold and silver from two mines. The El Gallo Mine is located in Mexico’s Sinaloa State; it is expected to produce 27,300 ounces of gold equivalent in 2013.
The Santa Cruz Province of Argentina hosts McEwen Mining Inc (NYSE:MUX)’s 49% owned San Jose Mine; Hochschild Mining is the operator and majority owner. For those not familiar with the company, McEwen Mining Inc (NYSE:MUX) is the result of combining U.S. Gold and Minera Andes.
In my mind (and many others), speculating on McEwen Mining Inc (NYSE:MUX) is a bet on Mr. Robert McEwen. As “Chief Owner,” Rob owns 25% of the company (at a cost basis of $125 million), and he does not pay himself a salary. In other words, if the stock doesn’t perform well, Rob doesn’t get paid.
In mining circles, some refer to him more humbly as “The Gold King.”
Why should you bet on Rob?
Rob was a strong leader on the team that built Goldcorp between 1986 and 2005— his experience and track-record speaks for itself. When comparing Rob’s compensation structure to that of other public company CEOs it’s tough not to walk away with a healthy amount of respect for the guy.
Over the past few years, Rob has been living in the house of pain. Shares of MUX are well off their 2011 high of $9.58. At a current market value of $628 million, investors are paying just 25% more than what the Gold King paid.
Although the company will lose money this year, 2014 has the potential to be a breakout year. Rob believes a $5 million dollar investment in the El Gallo plant could get the mill up to 5,000 tpd. At that rate, El Gallo has the capacity to pour 70,000 to 80,000 ounces of gold.
Bottom line, Rob has $125 million reasons to make sure McEwen Mining Inc (NYSE:MUX) is successful. As long as gold stays above $1,200 and the company performs on the operations front, MUX is cheap enough to bite on.
Harris & Harris Group, Inc. (NASDAQ:TINY) is a unique stock; it affords little-fish the opportunity to invest alongside the big-fish.
Harris & Harris Group, Inc. (NASDAQ:TINY) is an early-stage, active investor in transformational nanotechnology companies. As of December 2012, the company has a Net Asset Value (NAV) of $4.13.
Perhaps you’ve heard of a little thing called nanotechnology?
It’s actually pretty big, Lux Research expects $3.1 trillion worth of nanotechnology-enabled products to be sold in 2015. Scientific innovations in personalized medicine, clean technology, and quantum computing are happening at the nano scale.
Investing in TINY is a big opportunity for anyone with an appetite to make a diversified bet on nanotechnology.
You won’t be alone in doing so. Google Inc (NASDAQ:GOOG), Amgen and E I Du Pont De Nemours And Co (NYSE:DD) (just to name a few) have purchased equipment or acquired companies from Harris & Harris Group, Inc. (NASDAQ:TINY)’s private portfolio.
The team at Harris & Harris Group, Inc. (NASDAQ:TINY) is led by Mr. Doug Jamison; investors who appreciate a straight-shooter at the helm of their companies will appreciate Doug.
Publicly, Doug has also promised shareholders that Harris & Harris Group, Inc. (NASDAQ:TINY) will be managed such that no outside capital will be needed. Over the years, leadership at TINY has done a great job of keeping a tight float, with just over 31 million shares outstanding.
The stock has been consolidating (moving sideways to down) for over 5 years now; it feels like just about everyone has given up on it. Lately, it seems like good news does not matter. If you fancy yourself a contrarian- that’s a great sign!
Bottom line
Speculators who fish for stocks priced under $5 will eventually get treble-hooked by the market. Make sure it’s money you can afford to lose.
Improve your odds by using the “Less Than 1% Rule”
Do you think these stocks are really 1 of 100 type quality? Please take the time to leave your thoughts or a better idea in the discussion.
The article The 1% – Stocks Under $5 That May Hook You originally appeared on Fool.com and is written by Daniel Cook.
Daniel owns shares of TINY mini-Mutual Funds by Daniel T. Cook & Partners LLC. Daniel T. Cook & Partners, LLC is registered with the State of Florida as a (RIA) Registered Investment Advisor. Custodial and clearing services are provided through Scottrade Advisor Services, Inc. member. Daniel is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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