Penny stocks pillory companies

By Steven Syre
Globe Columnist / March 6, 2009
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Question: What could you get with a share of Citigroup Inc. yesterday?

Answer: Change from your dollar. That was true on and off during the day, when shares of the financial giant changed hands for as little as 97 cents before finishing the session at $1.02.

The fact that shares of a company such as Citigroup would trade at penny-stock levels was a shocking development, no matter how much trouble the financial conglomerate faces. But stocks trading below $1 per share, sometimes far below that level, are becoming increasingly common.

The penny-stock ranks are growing as markets continue to take a pounding, sinking more than 4 percent yesterday alone. The Dow Jones industrial average plunged 281.40 to 6,594.44, while the Standard & Poor's 500 index tumbled 30.32 to 682.55. The S&P benchmark closed at levels unseen since 1996.

US financial shares took a particularly hard fall, but the decline hit all industry sectors and stock markets around the world. Chinese officials dispelled hopes they would add to their stimulus plan, and investors braced for more bad news on US jobs that's due out today.

Slumping markets have already prompted leading stock exchanges to loosen listing requirements for companies whose shares are under intense pressure. Last month, NYSE Euronext temporarily eased a requirement for companies listed on the New York Stock Exchange to maintain a minimum share price of $1. The Nasdaq Stock Market had already temporarily waived several listing rules, including the $1 per share minimum price requirement.

The danger of delisting is only one headache that develops when a company finds itself in the world of penny stocks. Financing becomes harder to arrange and much more expensive. Stock researchers are less likely to cover shares trading below a dollar, making it less likely investors will remember or remain interested in the business stories of those companies.

Worst of all, a stock that trades for less than $1 looks like a loser. "Once you're there you're in a netherworld and you've got a death rattle," says Brian Stack, a portfolio manager at Pioneer Investments in Boston who invests in mid-size stocks.

There are stocks of all sizes in that category. Among companies included in the S&P 500, the ultimate blue-chip stock club, four saw their shares finish below $1 yesterday.

In Massachusetts, 37 of 232 public stocks traded below $1 yesterday. Virtually all of them have been clobbered since the stock market peaked on Oct. 9, 2007. On that sunny day, just five of the same 232 Massachu setts stocks were worth less than $1 per share.

Shares of Altus Pharmaceuticals Inc., a Cambridge company working on protein therapeutics, were worth $11.49 each in October 2007. They traded for just 17 cents yesterday. Shares of First Marblehead Corp., the student loan company in Boston, have plunged from $39.09 to 76 cents. Helicos Biosciences Corp., a Cambridge company that makes genetic-analysis equipment, saw its stock tumble from $8.75 to 50 cents. That's a very long way down.

Stack points out that some small companies with share prices quoted in cents are salvageable businesses victimized by a dearth of stock-trading activity. Anyone who wants to sell shares of a big company like Citigroup can always find a buyer, but an investor unloading the stock of a small business in a bad market may see prices plunge because no one wants to purchase the stock.

The vast majority of Massachusetts companies with stocks under $1 qualify as small. A few names may be familiar, but most are relatively obscure. At those prices, the stocks are probably going to stay under the radar.

Many life-science companies and biotechnology businesses pop up on the local list of shares below a dollar. They usually need multiple rounds of financing to develop products and prefer to go to the stock market for that money. Raising money was their purpose for going public in the first place.

"These biotech companies tend to have a [cash] burn rate," says Jim Weiss of Weiss Capital Management in Concord. "Until you get a product of some substance approved you have to continually replenish the cash."

Companies with stocks below $1 are long-shot bets to bounce back, but it does happen sometimes. Shares of Boston's American Tower Corp. sank to 75 cents in 2002 but climbed back to over $45 last year and closed yesterday at $27.35. Shares of Sonus Networks Inc., a Westford communications company, plunged below 20 cents in 2002 only to recover to more than $8 in 2007. Sonus stock has since slumped back to $1.18.

But most companies with shares below $1 don't experience any big stock market recovery down the road. Some go out of business, others are acquired at low prices, and others just continue bumping along the bottom of the market.

Shares of Ibis Technology Group Inc., a semiconductor wafer company in Danvers, traded for just a penny each yesterday. But the same shares were worth just 7 cents when the market was riding high in October of 2007.

No matter where a company's shares start, the penny-stock category is an expensive place that's hard to escape. More companies are learning that every day.

Steven Syre is a Globe columnist. He can be reached at

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