November 15th, 2008

Those "Perpetual, In-the-Money Call Options"

While watching CNBC last night, I was struck by the number of single-digit stock prices there were in the quotes crawler band at the bottom. Wow, look at all those non-expiring “options”! Familiar names whose stock price today wasn’t far from where an in-the-money LEAP might have been priced on the same stock last year. Sure, some are low priced because of the strong possibility that they will be worth $0.00 next year. But a good proportion of them carry low prices merely because of fear and today’s investor psychology.

Another way of looking at the situation. Could I put together a speculative basket of some low-priced stocks, put them away and lock them for some time far in the future. Obviously, some will wind up being worth nothing but the % gain on the others would be more than enough to absorb those loses and still generate a very nice profit (o.k., you got me; this just may be one “buy-and-hold” strategy I could endorse).

So how many stocks are there selling under $10? It’s more than you might imagine. According to my chart service data, 41% of the Russell 3000 stocks, or 1201, closed Friday at under $10. Is that amazing or what? And of those 1200 stocks, more than half closed under $5.

Of course, the economy is bad and getting worse but is the world coming to an end? Are all these companies going to go bust? Will this country be thrown back to the 19th century in terms of our economic and societal development? Without taking the time to analyze their financials to understand how bad their condition actually is, here are some of the names in the under-$5 group:

  • TSN (Tyson Foods) – 4.90
  • VOL (Volt Info Sciences) – 4.90
  • PERY (Perry Ellis) – 4.83
  • TWPG (Thomas Weisel Partners) – 4.05
  • LUB (Luby’s) – 4.04
  • PBY (Pep Boys Manny ….) – 3.58
  • MTEX (Mannatech) – 3.38
  • ARNA (Arena Pharm) – 3.40
  • OWW (Orbitz WW) – 3.00
  • SWHC (Smith & Wesson) – 2.54
  • GY (Gencorp) – 2.62
  • RMIX (US Concrete) – 2.10

You get the picture. Granted, some of these will go bust but many of them will survive and, with a high degree of probability, sometime over the next 5-10 years will get into the mid-teens. I can’t guarantee it but that’s the way the pendulum swings. If half go bust and the other half increases by 10%, it’s a wash. If the surviving half doubles (not unreasonable for low priced stocks) while half go bust, the return on the whole basket is 80%. Obviously, if less than half go belly up, the returns improve. You do the math.

The last thing I wanted to see was how this compares to the 2003 Tech Bubble Crash.

The number of stocks closing $5 or less is almost 43% more than there were at the bottom in 2003. The either says this economy and market crash are more severe than conditions in 2003 or that the market is more pessimistic than in 2003 [note: 674 stocks were added to the Index since 2003; Telechart has to explain the 70 missing charts].

In the interest of full disclosure, I need to point out that the stocks comprising the S&P 500, Nasdaq 100 and the DJ 30 faired better vs. 2003 than the smaller firms in the Russell 3000 (or, we’re facing further market declines in the stocks comprising these other indexes). Their results were:

Again, this could be a strategy but one to be considered only after an unequivocal bottom has been established (for example, after the MTI signals the all-clear).

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