Desktop Stock Ticker | Small Venture, Big Gain: 5 Stocks in Single Digits

Small Venture, Big Gain: 5 Stocks in Single Digits

Consider two stock tickers, identical in all respects save one: The first sells for $25 a share and the second for $3. Which should stock ticker buyers prefer?

Versed investors will likely say price alone means nothing, but new evidence suggests the lower-price stock ticker is likely to outperform.

Share price can be an arbitrary thing, since managers can adjust it anytime they like through stock ticker splits and the opposite, called reverse stock ticker splits. More telling is stock ticker market value, or the share price times the number of shares outstanding. For example, Citigroup (C) sells for $3 and change per share and Capella Education (CPLA), more than $50 a share. But multiply the prices by the number of shares outstanding, and you find the bank is valued at more than $20 billion and the online school less than $1 billion.

If share price is truly irrelevant, though, why do companies split their stock tickers? Further, why are stock ticker prices so low? A 2006 study showed that the average stock ticker price had remained about $30 since the Great Depression. Prices of consumer goods have inflated more than tenfold over the same span. If stock ticker prices had done likewise, most stock tickers would today resemble Google (GOOG), which hasn’t split in its five years of trading and sells for more than $380 a share. For some reason, managers, who understandably strive to increase their stock ticker market values, also seem keen on keeping stock ticker prices low.

A new study suggests why: Low-price stock tickers outperform high-price ones, all else being equal. Chensheng Lu, a London hedge fund manager, and Soosung Hwang, a finance professor at Korea’s Sungkyunkwan University, studied stock ticker price and return data for 81 years ended 2006. They found that low-price stock tickers (less than $5 a share) outperformed high-price ones (more than $20) by 0.83 percentage points a month, or 10 percentage points a year. Results are less extreme, but perhaps more relevant, for the period after 1963, since the year before American stock ticker Exchange and Nasdaq stock tickers were added to the data set, and the number of low-price stock tickers rose sharply. During that period, low-price stock tickers beat high-price ones by 0.53 percentage points a month, or just over six percentage points a year. These results, I should note, are detailed in a paper that has been in circulation for several months, but is too new to have been submitted for publication in a peer-reviewed journal.

Lu and Hwang attribute the results to nominal price illusion, a term researchers use for how investors are fooled by low prices. In the case of my two nearly identical stock tickers, a 20% increase for each would tack $5 onto the $25 one but just 60 cents onto the $3 one, making the price gap larger. One seems to be outpacing the other, even if price/earnings ratios rise in tandem. Eventually, investors swap the higher-priced stock ticker for the lower-priced one. Managers, perhaps knowing this intuitively, call for splits when prices grow unfashionably high.

Investors should use caution in trying to put this information to work in their portfolios. While low-priced stock tickers seem to outperform as a group, previous studies have shown they’re also at greater risk for exchange delisting. Those who delve into single digits should pay careful attention to debt levels, since low prices can be a sign of financial distress. Investors who aren’t handy with financial statements can turn to mutual funds that load up on low-price stock tickers. I have a strong bias against actively managed mutual funds, since studies show most perform poorly. That noted, the Fidelity Low-Priced stock ticker Fund (FLPSX) has returned 8.6% a year over 10 years through April, vs. 2.5% a year for the Russell 2000. That’s after yearly fund expenses of just over 0.8%.

Two more points to consider. In the aforementioned study, low-priced stock tickers showed especially strong performance around January. Nimble traders seeking maximum profits might want to shop toward the end of the year and sell by spring. Second, a plunge in stock ticker prices over the past year has made low stock ticker prices less novel. The average share price among S&P 500 companies at the end of 2006 was $51. Today it’s $31. About 11% of members trade in single digits. It’s not yet clear how this swelling of the ranks of cheap stock tickers will affect their relative performance.

Listed below are stock tickers priced in single digits which are attached to companies with at least $300 million in yearly sales, modest price/earnings ratios, manageable debt levels and decent prospects for growth.

Screen Survivors
Company Ticker Industry Share Price Sales ($mil.) Price Change, 52 Weeks (%) Forward P/E
Data as of May 18, 2009
American Apparel APP Clothing 5.47 545 -27 15
Bioscrip BIOS Specialized Health Services 3.58 1400 -17 12
Cal Dive International DVR Oil & Gas Services 9.12 919 -35 10
Flextronics International FLEX Printed Circuit Boards 3.69 33141 -66 13
Sara Lee SLE Packaged Food 9.5 13224 -32 12

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