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The weak market conditions have caused many stock prices to fall under $10. Not only smaller -- and perhaps lesser known -- stocks trade under $10 these days, but also some big and famous names such as Ford Motor Co. (NYSE: F), Motorola Inc. (NYSE: MOT), Sprint Nextel Corp. (NYSE: S), Washington Mutual Inc. (NYSE: WM) and Del Monte Foods (NYSE: DLM), as well as many airline companies like Northwest Airlines (NYSE: NWA) and JetBlue (NASDAQ: JBLU). While those names could sound tempting for investors who may think they are cheap, BusinessWeek's Karyn McCormack reminds us that not everything that is cheap is a good bargain, and there are some risks that need to be taken into account.
One common problem for most of these stocks is that they trade under $10 for a reason. That reason is usually hardly any earnings growth, if any at all. And with a weak economy, these companies would have an even harder time to stimulate growth. Add to the mix the fact that institutional investors don't like to touch stocks under $10 and the potential for recovery is not good.
In addition, for companies like Ford and Motorola, the problems compound as they find it difficult to address changing customer demands and needs. After they each focused on one business model such as Ford's focus on sport-utility vehicles and trucks and Motorola's focus on the RAZR wireless handset, they both have lost considerable market share to competitors as they have both failed to respond to changing demands.
But there are still some hopes for these stocks. If we take a look in the past, even Apple Inc. (NASDAQ: AAPL) was under $10 in the summer of 2003 and is currently trading over $170, while Research in Motion Ltd. (NASDAQ: RIMM) dropped under $10 between 2001 to 2003, and now trades for $118.
As a last piece of advice, the article reminds us that there is always a reason for single-digit stocks to be priced at such a low level and it is not something that should pass unobserved for investors. With so much turmoil in the market, it may not be the wisest move to add smaller, riskier stocks.
Eliza Popescu is a financial writer for the online investment advisory service Investor's Observer.
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