July 28, 1998

Challenging some penny stock myths

By JOHN CUNNIFF
AP Business Analyst

NEW YORK -- You might think this is hardly the time for a book about penny stocks, the market already being in high fever over speculative investments.

But that's because you think penny stocks are a gamble.

Measuring a stock by its price, and thereby labeling low-priced stocks as cheap and speculative, is one of the enduring myths of the marketplace. A myth indeed, says Harry Eisenberg, who has the facts at his command.

Eisenberg, a certified public accountant, has compiled a massive database on such stocks, including 25 categories of numerical specifics that allow readers to make objective judgments for themselves.

Having sold his firm and satisfied retirement desires -- he's still in his 40s -- Eisenberg set up an office near his home in Lafayette, Calif., wrote thousands of letters to companies, scanned data from the Securities and Exchange Commission, and computerized it all in a standard format.

The result is the first annual edition of Walker's Manual of Penny Stocks, completing a trilogy of database manuals, the first being on unlisted stocks, the next on community bank stocks.

Information on so-called penny stocks is often difficult for the public to obtain, a contrast with listings on the New York Stock Exchange. In many instances the penny-stock companies are little known or understood by investors.

And yet, the companies compiled and detailed in Walker's Manual -- 500 of them, culled from more than 6,000 penny stocks -- include extremely high quality companies, profitable, growing and at bargain prices.

Few products have more myths about them than this category of stocks. They do not, as you might have thought, have to sell for under $1. The stocks in the manual sell for as high as $5.

But, you say, that makes them dollar stocks. Of course they are, but the SEC in 1992 declared penny stocks to be the shares of any company that are priced under $5. How's that for confusion? Well, a beginning.

The SEC definition also included the limitation that a penny stock was one not traded on a national securities exchange or quoted in the Nasdaq list maintained by the National Association of Securities Dealers.

Perhaps unintentionally, that definition suggested that an exchange listing was a sign of quality and that not being listed was indicative of inferiority. It helped worsen the connotation of penny stock.

Moreover, it eliminated from the definition 1,700 Nasdaq stocks that on Dec. 31, 1997 were selling for $5 or under, along with 219 listed on the American Stock Exchange and 111 on the New York Stock Exchange.

In truth, the shares of many unlisted penny-stock companies, found among thousands quoted on weekly Pink Sheets and listed on the Over-The-Counter Bulletin Board, are of the highest quality.

The level of quality can be determined by referring to the numbers and ratios of the stocks in the manual. Eisenberg himself is attracted to high growth rates, strong balance sheets and repeat profitability.

That said, there are caveats to follow. Walker's Manual, after all, is a refined list of some of the best in a universe of thousands. Many small companies are closely held. In some instances, prices can be volatile.

Investing, however, involves risks, and some of the penny-stock rewards offset the risks. They often own market niches. Many are well-managed. Prices are often bargain-basement level, and can grow swiftly.

Already, 30 stocks listed in the first edition, based on prices at the close of 1997, no longer qualify for the manual, having grown beyond the penny-stock definition.

The publication referred to in this story is available from Walker's Manual LLC, 3650 Mt. Diablo Blvd., Suite 240, Lafayette Calif. 94549-3765. Phone: (800) 932-2922. Fax: (510) 283-9513.