As I wrote a few weeks ago, traders and fans of low priced stocks should ignore fallen blue chips like Ford Motor Co (NYSE: F) and Sirius Satellite Radio (NASDAQ: SIRI) and focus more on smaller volatile stocks like China Precisions Steel Inc (NASDAQ: CPSL) and Solarfun Power Holdings (NASDAQ: SOLF). Not just because fallen blue chip stocks are all about guessing major business trends and the time lags involved with pricing those into their stocks -- good luck with that -- but because these lesser known plays offer much more predictability due to their speculative nature.
Earnings, profit margins, product potential is all well and good for long-term investors in higher-priced names, but here in the gutter of the stock market (also known as penny stock land), those variables are highly irrelevant to predicting hourly, daily and even weekly price swings. Down here it's all about self fulfilling prophecies, pumping and message board hype.
Take for example, Middlebrook Pharmaceuticals (NASDAQ: MBRK), mercilessly pumped by TheStreet.com's Adam Feuerstein for the past several months as a takeover candidate, as his sources indicate bidders in the $6 to $8 range. Now he might be right -- not that it's going to matter to the SEC -- and while he certainly can't compete with CNBC, in terms of effectiveness, his credibility and frequent teasing have predictably pumped this stock up a solid 20-30% so far.
So, this is my answer to you guys. I'm also going to throw in Broadcom Corporation (NASDAQ: BRCM), AT&T Inc. (NYSE: T) and Ebay Inc. (NASDAQ: EBAY) because they all share the same horrifically downtrending charts!
I've already written about how you should avoid these kinds of stocks, but I know many of you are already down too much to even contemplate getting out now. Luckily for you, there now looks to be a glimmer of hope.
While I believe much of the price action in the most actively traded technology stocks to be rather unpredictable, there are specific price points at which the odds can be in your favor. Because so many traders believe in chart reading, or technical analysis, the price action often becomes a self-fulfilling prophecy (as I've written about here). So, let's take a look at some popular names with traders:
Apple Inc (NASDAQ: AAPL), after a big drop, has already put in solid sideways price action and if it can break $140, there looks to be a rather clear path to $160.
Research In Motion Ltd (NASDAQ: RIMM) has weathered this storm incredibly well, putting in a solid double bottom in the low $80s and more recently, holding the key $100 level. There's still resistance at both $110 and $120, so a big breakout doesn't seem likely anytime soon.
Priceline.com Inc (NASDAQ: PCLN) is still in the midst of a strong yearlong uptrend, a mere $10 off its highs. On any market rebound, I fully expect this stock to break out to new highs.
My friend and trader Tim Sykes is a big fan of ignoring blue chips in favor of more volatile penny stocks -- many of which he admits are outright frauds, but can still serve as vehicles for profitable speculation.
But there's something fascinating about the names in that list: They are exclusively banks and tech companies. I have to wonder then -- how many of the investors who lost money on those stocks read and understood the risks disclosed in the SEC filings, particularly those pertaining to to loans and accounting?
My bet is that none. It seems that the people who did the in-depth research to really "buy what they know" on the financials ended up shorting. William Ackman's brilliant bets against bond insurers come to mind.
Bottom line: Looking at some ratios and then buying a stock because it has a good dividend, high ROE and low P/E does not constitute buying what you know. The people who lost money on these stocks, I would argue, had no idea how the companies they were investing in really earned their money. They weren't buying what they knew after all!
With all the recent news and arguing over CEO pay here, here and here, I thought I'd step up to the plate and inject some reason into the discussion. After reviewing all the data, I can only conclude that since these CEOs are the world's best teachers, they deserve much higher pay and respect. I'll explain.
According to PayScale, the average schoolteacher makes approximately $40,000 per year. In any given year, how many students can they teach? A few hundred? Maybe a few thousand. Let's be generous and say 4,000 students. So, we're talking $10 per student per year.
Since, as investors, you should care only about stock performance, not business performance, we must apply the same pay scale to high profile CEOs who have taught hundreds of millions of shareholders the most important investing lesson of all -- to never trust anything they say, especially when they are so eternally optimistic. Let's also add up the shareholders from all these big struggling companies and do the math; we come to 100 million shareholders (in reality, if we add in all the pension plans and mutual fund investors, the number is many times greater) at $10 per student per year, or $1 billion.
Now, thanks to my handy WSJ CEO scorecard and my previous article dealing with CEO pay, we see the salaries of all CEOS of the biggest companies with the angriest shareholders. Here's the list:
All it takes is some news to make you realize the risk involved in smallcap investing. That news came in the form of a horrific earnings report last night from Origin Agritech (NASDAQ: SEED), showing revenues and margins decreasing along with guidance that was more than 50% below the estimates of the one analyst that covers the company.
I often advise against trusting any company whatsoever, but it's rare that one lets investors down so greatly. I had no position in the stock, but along with Converted Organics (NASDAQ: COIN) and Titan Machinery (NASDAQ: TITN), I profiled Origin back in January as an up and coming agriculture stock. Since then, two of those three stocks have broken out to new highs in a similar fashion to this hot sector's leaders like Potash Corp. of Saskatchewan (NYSE: POT), Mosaic (NYSE: MOS), Monsanto (NYSE: MON) and Agrium Inc. (NYSE: AGU).
Performance aside, those billion dollar behemoths are established companies, with global investors and brands, while these new kids on the block are the exact opposite. Plagued by having few products, fund raising problems and debt issues, this 50% shortfall exemplifies just one of the many issues with which small-cap companies struggle. I mean they are really fighting for lives! And that's why they are priced the way they are and derided by Wall Street.
Last month at the Sundance Film Festival, I saw some great movies, partied it up a bit and schmoozed with celebrities. Perhaps it's the pseudo-celebrity status that came with my TV show or the $300,000+ personal loss I took on an investment I truly believed in, but I never get starstruck anymore. Not with celebrities and definitely not with companies. And as an investor, you can learn from this. I'll explain.
While at the festival, I bumped into "celebrity" Maria Bello, and my ability to have a casual conversation with her led to an interesting encounter highlighted by some flirting and several great pictures (see them all HERE).
Ms. Bello barely gave starstruck, incredibly crazed, fans the time of day; after all, nobody -- celebrity or not -- can really take anybody who's screaming and crying in awe of their presence very seriously. So, while it was a fun moment for me, I couldn't help but think how this related to the stock market.
Judging by my latest emails, everybody wants to know "how should I play the financial sector right now?" Let me make it real simple for you: avoid this entire sector at all costs. Don't buy them and don't short them, at least not yet. I've been repeating the same thing over and over since December, so while I know this will leave many unsatisfied, nothing much has changed in two months. In fact, the recent downgrade concerns over bond insurers MBIA (NYSE: MBI) and Ambac Financial (NYSE: ABK), student lender Sallie Mae (NYSE: SLM) and more importantly, prime mortgage lender Fannie Mae (NYSE: FNM), means the situation has gone from bad to worse. Yes, we still risk economic disaster and that's when defaulting consumers could really hurt credit card companies American Express (NYSE: AXP) and Mastercard (NYSE: MA).
But thanks to the lack of transparency in this industry, there's simply no way to accurately judge how bad things really are and as I learned the hard way, accurately gaming disaster is next to impossible.
The good news is that if I had to guess, I'd say the chances of a true disaster are slim. Given that this seems to be an increasingly popular view, many of these financial stocks have been punished to the point of exhaustion. And just as I wouldn't buy them, I wouldn't short them here either. Despite the seemingly steady stream of negative news, the risk of further damage to shareholders and the overall market crashing all around them, broker stocks like Goldman Sachs (NYSE: GS), Bear Sterns (NYSE: BSC), Merrill Lynch (NYSE: MER) and Morgan Stanley (NYSE: MS) have basically stopped going down. They haven't bounced much either, but the nation's three largest banks Bank of America (NYSE: BAC), Citigroup (NYSE: C) and JP Morgan (NYSE: JPM) have managed that feat, with all three bouncing considerably off their lows.
Armored vehicle maker Force Protection (NASDAQ: FRPT) has been slammed down to the single digits on fears that its sole product might be on the way out because of cuts in government spending. Who knows? The CEO says the company is doing fine, but the downtrending stock price is much more convincing. If the stock price is meant to make up lost ground, it should have no problem breaking out past $6, which it has not been able to do for the past few months. I'd avoid until the stock shows some strength.
Within the past few days, IDM Pharmacueticals (NASDAQ: IDMI) has had a huge run-up from under $1 to nearly $4 and a substantial drop to just under $2 -- all due to some positive drug news that was already known since November 2007, and of course the CEO's optimism about European approval. Do I believe the CEO? Yeah right! My distrust of CEOs is dwarfed only by my distrust of biotech CEOs! This company is not in the same league as other recently hot biotechs like Savient Pharmaceuticals (NASDAQ: SVNT) and Rigel Pharmaceuticals (NASDAQ: RIGL). Avoid, with a short bias on any spikes.
When I wrote this article about A-Power Generation Systems (NASDAQ: APWR), all the variables were aligned for a great run-up. I wanted to hold, but the volume and share price didn't live up to my expectations, so I sold quickly. Now, this company, potentially the new First Solar (NASDAQ: FSLR) of wind energy, has nearly retraced to its original breakout area around $15, so the risk has gone down ... but so has the reward. If you're a long-term investor, this is a solid choice, but I need it to break its previous highs at $19 to make me a buyer again. Avoid, with a long bias if it breaks out.
In a recent post on his personal blog, trader Timothy Sykes told investors to "respect the hype" in six particular penny stocks. This perspective runs in-line with Tim's philosophy that investing in penny stocks is a probability game technical analysis is the best way to play. Although I'm sure money can be made by playing the greater fool theory, after looking at some of Tim's picks, I have concluded that the risks surrounding one of them -- BioSolar (OTC BB: BSRC) -- are enormous.
BioSolar is currently being "pumped" by Beacon Research according to Sykes, and we should all "respect the pump," he argues. While I understand short-term traders try to profit from quick share price moves in these sort of companies, this situation seems way too risky for the average trader or investor.
My main concerns: 1) Beacon Equity's report makes several outlandish assumptions, 2) the company's CEO appears to have ties to other penny stocks (he did not deny those claims via my recent email exchange with him), and 3) I'm highly skeptical of BioSolar's ability to create new technologies for a variety of reasons.
The purpose of this piece is to raise important issues any potential investor should see before investing in BioSolar. I have no position (long or short) in this company, I am not accusing BioSolar or its executives of perpetrating a fraud, and I am not personally aware of any short sellers involved in this stock.
"I can't believe I won," cried Jordin Sparks, winner of last year's American Idol. Within seconds, industry and non-industry drones alike began formulating ways to attach themselves to her in some way, crazy in anticipation of the inevitable riches.
Months later, several Wall Street types were overheard saying, "I can't believe oil keeps going higher, alternative energy stocks are going to be hot, hot, hot," and thousands of investors went wild buying shares of the dozen or so solar stocks, crazy in anticipation of the inevitable riches.
Each industry has its stars: Kelly Clarkson, Carrie Underwood and Clay Aiken -- as determined by album sales -- for American Idol, First Solar (NASDAQ: FSLR), Sunpower (NASDAQ: SPWR) and MEMC Electronic Materials (NYSE: WFR) -- as determined by stock performance -- for the solar industry.
You just have to laugh at price targets. Investors love them, so analysts and "experts" keep using them. I think they are dangerous – even though they are long-term in nature, they influence people's short-term expectations. When I wrote this article about Solarfun (NASDAQ: SOLF), I predicted further strength ahead, but I didn't know the stock would break out to all-time highs. Even though it did, I would've written the article exactly the same, because my only aim was to predict the overall price trend.
So when I see a $300 price target gets slapped onto Apple (NASDAQ: AAPL) here and here, I become determined to wave a caution flag instead of being yet another cheerleader. Which brings me to why I think buying this stock is becoming increasingly dangerous – cheerleading. Cramer, Yared, Smith, Johnson, Williams, Jones and Brown (two commentators and the five most common last names) love the story - the new products, the developing product cycle, the margins, the potential for growth, blah blah blah. Everybody is so incredibly comfortable in assuming that business performance is directly related to stock performance. I think there's a correlation, but it's not as high as everyone believes – incredibly well managed General Electric (NYSE: GE), whose stock was up an astounding 0.37% in 2007 comes to mind. So, I'd like you to consider a different variable – expectations. And expectations for Apple are already sky-high.
To a cynical guy like me, Apple's story seems too perfect, and it's been my experience that when everyone gets this excited about a stock that has decupled (10 times) within four years, caution is warranted. Mainly because if this company disappoints in any way, these cheerleaders could turn faster than a Spears' sibling when she's fertile.
I often find myself in agreement with my friend Tim Sykes. When I'm looking to make a trade, I often look at the chart and attempt to gauge the sentiment, just as he does. However, when I saw Sykes proclaim that LDK Solar (NYSE: LDK) had "further upside," I had to give the opposite view.
I'm not going to try and concoct an argument against solar stocks. In fact, I'm sure solar technology will do huge things for the American energy crisis in years to come, but I know one thing after watching the market for several years -- any sector or stock that gains a stubborn, cult-like following is probably going to end up suffering at some point in the future. The most cult-like stocks, in my opinion, are momentum stocks.
Don't get me wrong, I play momentum stocks. However, I admit I'm just playing the greater fool game when I'm trading these stocks. In other words, I admit I'm just trying to be another person trying to pull money out of the market by buying an irrationally-priced asset and hoping to sell it at an even more irrational price. The problem comes when investors and traders come along and try to justify the valuation the stock is currently receiving. I've learned a lesson I'd like to share with momentum traders: don't try to rationalize your buys by claiming the stock is 'undervalued' and looks long term, especially if that is way different from your normal decision making process that takes advantage of certain strengths you have cultivated over time.
As I wrote a few weeks ago, traders and fans of low priced stocks should ignore fallen blue chips like Ford Motor Co (NYSE: F) and Sirius Satellite Radio (NASDAQ: SIRI) and focus more on smaller volatile stocks like China Precisions Steel Inc (NASDAQ: CPSL) and Solarfun Power Holdings (NASDAQ: SOLF). Not just because fallen blue chip stocks are all about guessing major business trends and the time lags involved with pricing those into their stocks -- good luck with that -- but because these lesser known plays offer much more predictability due to their speculative nature. 
No matter how hard I promote my 
While I believe much of the price action in the most actively traded technology stocks to be rather unpredictable, there are specific price points at which the odds can be in your favor. Because so many traders believe in chart reading, or technical analysis, the price action often becomes a self-fulfilling prophecy (as I've written about 
All it takes is some news to make you realize the risk involved in smallcap investing. That news came in the form of a 
Last month at the Sundance Film Festival, I saw some great movies, partied it up a bit and schmoozed with celebrities. Perhaps it's the pseudo-celebrity status that came with my 
Armored vehicle maker 
BioSolar is currently being "
You just have to laugh at price targets. Investors love them, so analysts and "experts" keep using them. I think they are dangerous – even though they are long-term in nature, they influence people's short-term expectations. When I wrote 
Starbucks: The next McDonald's
Wal-Mart's launch of $20 slimming jeans will be a huge success
Why I spent some of my stimulus check on GE
