Some Valley Penny Stocks a Bargain, With Change Back
They’re not exactly “Pennies from Heaven,” but penny stocks accounted for some of the fastest-rising prices among shares of San Fernando Valley-based public companies in 1999.
Ranging from cutting-edge technology firms to mundane businesses such as restaurants and oil refiners, penny stock companies based in the Valley run the gamut from growing start-ups to long-established enterprises.
They include companies that design computerized thrill-ride simulators, process Internet sales transactions, develop innovative medical technologies, manufacture fuel cells, design telecommunications products, produce television shows and movies, and publish magazines.
They include familiar names, like Panavision and Jerry’s Famous Deli, as well as a host of lesser-known companies.
Penny stocks are generally defined as shares trading for under $5, but some of them can, literally, be bought for pennies.
Take Spatializer Audio Laboratories of Woodland Hills, which posted the biggest percentage gain in stock price among all Valley-based penny stocks for 1999--soaring 883%.
Sounds pretty good, until you check the closing price on Dec. 31: 92 cents.
Spatializer, which develops sound-enhancing technologies used by makers of TVs and other electronics products, has plenty of company. Of the 29 Valley companies that qualified as penny stocks at year’s end, 14 were trading for under a buck.
Spatializer’s improved stock performance in 1999 resulted from a turnaround after the company abandoned a money-losing venture into unfamiliar technology and returned to its roots, according to Henry R. Mandell, who has been interim chief executive since September 1998.
The company in 1999 turned its first quarterly profit in eight years, but before that it was losing between $4 million and $5 million a year in a failed effort to develop a new computer data-storage system using CD-ROM technology, Mandell said.
Under Mandell, Spatializer has jettisoned the data-storage project and focused on its original purpose: designing technology that enhances the sound systems of stereos, TVs, computers and other products.
“That data-storage endeavor was too much for a company of our size [eight employees] to maintain. It caused us severe financial difficulties,” Mandell said.
Mandell sees a number of bright spots for the company, including a recent infusion of $1 million in working capital and the growth of the DVD market, although he acknowledges that the consumer electronics market in which Spatializer operates is fiercely competitive.
Technology was also the ticket for many of the other top performers in the penny stock sector. The top five percentage gainers, in fact, were all involved in technology or a combination of entertainment and technology.
The year’s second-best performer was Valencia-based DCH Technology, which finished 1999 at $2.97, up 251.9% for the year and 458.8% for the fourth quarter, according to Bridge Information Services.
Chairman David Haberman describes DCH as connected to the existing industrial base through the manufacture of hydrogen sensors used in industrial plants, while it’s connected to the future through its development of hydrogen fuel cells to be used as sources of electrical power.
DCH’s sensors are used to ensure that hydrogen does not exceed acceptable levels in the dozens of industries in which the gas is used, ranging from food processing to aerospace. In its fuel cell business, DCH is one of a number of companies working on technology that turns hydrogen gas into electricity.
Others in the Valley’s top five penny stock performers are Studio City-based Cinema Ride Inc., Agoura Hills-based Interscience Computer Corp. and Brilliant Digital Entertainment of Woodland Hills.
Cinema Ride develops and operates motion simulator rides, while Interscience provides computer maintenance services and BDE produces movies and other entertainment for distribution over the Internet, on CD-ROM and DVD, and for television.
Electronic Clearing House Inc. of Agoura Hills, which processes credit card sales and other Internet transactions, finished 1999 at $2.50 a share, up 135.29% for the fourth quarter and more than 21% for the year.
“We like to say our claim to fame is that we’re one of few Internet-related companies making money,” said Joel M. Barry, chairman and chief executive of the company, which posted net income of $911,000, or 9 cents a share, for the third quarter ended Sept. 30.
Barry said the company, which grew to 135 employees this year from 115 last year, is poised to take advantage of the increase in Internet sales as well as other facets of electronic transaction processing.
For example, ECH designed and sold an automated money order issuing system to American Express, is involved with the U.S. Postal Service on a pilot project to do the same, designed a system to track truck rentals for U-Haul, and has applied for permission to open an Internet bank.
The price jumps of some penny stocks may seem to suggest that they’re more likely to leap than their higher-priced counterparts, but that’s a misconception, according to Lafayette, Calif.-based analyst Harry Eisenberg, author of Walker’s Manual of Penny Stocks.
“People look at a stock priced at 50 cents and think it only has to go up 50 cents for a 100% gain. That’s true, but the logic is flawed because the odds are you’ll have the same percentage of price movement in a $50 stock as you will in a 50-cent stock,” Eisenberg said.
An analysis of Valley penny stocks bears Eisenberg out. Overall, penny stocks performed pretty much like the rest of the stocks of Valley-based companies. Of the 29 penny stocks, about half declined in price for the year--which is about the same for the 44 stocks trading at more than $5.
Despite prices that make them look like bargains, Eisenberg said penny stocks are no more likely to be bargains than higher-priced shares and in many cases would be a bad buy at any price.
“The first question an investor should ask is, ‘Why is this stock priced under $5?’ ” Eisenberg said. “Often, it’s because the company has performed poorly and has poor prospects, he said.
On the other hand, Eisenberg said, penny stocks “have gotten a terrible rap in the financial press” because of some high-profile scandals involving ‘pump-and-dump” investors or brokers. Promoters of pump-and-dump scams issue reports touting a stock as a great buy to boost its price. When prices zoom up, the promoters sell the stock at a big profit, leaving unsuspecting investors to lose heavily when the stock plummets.
Penny stocks are more vulnerable to pump-and-dump schemes because they generally get less scrutiny by Wall Street, said James Ragan, an analyst with Crowell Weedon & Co. in Los Angeles who specializes in small to mid-sized West Coast companies.
“Also, with the tremendous growth of the Internet, a lot of individual investors are getting their investment ideas from chat rooms, where it’s easy for someone to go in and hype a stock,” Ragan said.
Some investment advisors flatly dismiss penny stocks as too risky. Analyst Eisenberg takes a more moderate view, saying the wisest course for anyone contemplating a penny stock investment is to research it thoroughly, starting with the question of why the stock is under $5.
“There’s always a reason. Sometimes it’s a reason the investor can accept, sometimes it isn’t,” Eisenberg said.
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‘99 and 4th Quarter Stock Scorecard
Some of the Valley area’s biggest and best-known companies--including Disney, Litton Industries, Countrywide and Dole Foods--saw stock prices decline this year, while upstarts MRV Communications and Vertel posted big gains.
* Source: Bridge Information Systems.
