Download Market Buzz - Penny Stocks – Two Common Fallacies

Market Buzz - Penny Stocks – Two Common Fallacies
Written by Ryan Irvine - Keystone Financial
Saturday, 24 July 2010 08:32
Market Buzz - Slowing Growth Trend Continues, North and South
While the S&P/TSX Composite Index closed Friday down 15.21 points to 11,713.43, it ended
the month 3.7% high, continuing its recovery from the relative carnage we saw in May.
Having said this, going forward, investors will have to weigh the underwhelming growth readings
released today for both Canadian and U.S. economies. Statistics Canada said the country’s
gross domestic product grew by 0.1% in May, better than the flat reading in April but slower
than experienced in the first quarter.
In the U.S., the Commerce Department reported that the GDP grew at an annual pace of 2.4%
from April to June. The number was less than the 2.5% that economists had expected.
Immediately following their releases a number of commentators indicated the twin reports
suggest that Canada is maintaining a slow-but-steady recovery from the recession while the
U.S. is waging a tougher battle to regain ground. For us however, the overarching theme was
one the North American economy’s abrupt Q2 2010 slowdown from the first quarter’s strong
growth.
The Canadian economy’s tepid growth of 0.1% seen in May, while up from a flat reading in May,
is a far cry from the spectacular growth spurt that began last fall and continued into this year,
when the economy grew 4.9% in the last quarter of 2009 and a decade best 6.1% in the first
quarter of 2010.
While the May pace is not disastrous, it will make it difficult for the economy to match the Bank
of Canada’s recent projection of 3% growth in the second quarter, which ended June 30.
Switching gears to our Canadian Small-Cap Universe (www.keystocks.com) we take a quick
look at a long-time favourite of ours, Glentel Inc. (GLN:TSX), a leading provider of innovative
and reliable telecommunications services and solutions in Canada and the United States.
Glentel has grown to become the largest multi-carrier mobile phone retailer in Canada operating
more than 280 locations.
This past week the company reported that its sales for the three months ended June 30, 2010
grew 16%, to $78.97 million from $67.85 million in the same period of 2009. Net income and
basic earnings per share for the three months were $3.76 million or $0.34 per share
respectively, compared to $2.64 million or $0.24 per share, for the same period in 2009.
We are happy to report the stock surged just under 10% on the news and hit a new all time high
this past week.
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Market Buzz - Penny Stocks – Two Common Fallacies
Written by Ryan Irvine - Keystone Financial
Saturday, 24 July 2010 08:32
Looniversity - Penny Stocks – Two Common Fallacies
Two common fallacies pertaining to penny stocks are that many of today’s stocks were once
penny stocks and that there is a positive correlation between the number of stocks a person
owns and his or her returns.
Investors who have fallen into the trap of the first fallacy believe Wal-Mart, Microsoft, and many
other large companies were once penny stocks that have appreciated to high dollar values. Many investors make this mistake because they are looking at the “adjusted stock price,” which
takes into account all stock splits. By taking a look at both Microsoft and Wal-Mart, you can see
that the respective prices on their first days of trading were $28 and $25 even though the prices
adjusted for splits is $0.09722 and $0.02444. Rather than starting at a low market price, these
companies actually started pretty high, continually rising until they needed to be split.
The second reason that many investors may be attracted to penny stocks is the conception that
there is more room for appreciation and more opportunity to own more stock. If a stock is at
$0.10 and rises by $0.05, you will have made a 50% return. Couple this with the fact that a
$1000 investment can buy 10,000 shares convinces investors that micro-cap stocks are a rapid
surefire way to increase profits. Truth be told, without independent research from a company
like say KeyStone Financial (www.keystocks.com) which happens to specialize in the smalland micro-cap markets, many investors end up with pennies on the dollar from investing in
so-called “penny stocks.”
Put it to Us?
Q. Can you give me a quick overview of “contrarian” investing or the contrarian style of
investing?
- Gabriel Wilson; Calgary, Alberta
A. Ah, the contrarian – you say black, he says white; up – down; bad – good; you get the
picture. A contrarian investor is generally an individual that invests against market trends and
does not follow the prevailing consensus view. Yes, a true rebel, maverick, or rogue of the
intriguing world of investing – yeah, right!
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Market Buzz - Penny Stocks – Two Common Fallacies
Written by Ryan Irvine - Keystone Financial
Saturday, 24 July 2010 08:32
Generally, a contrarian investor believes that the people who say the market is going up do so
only when they are fully invested and have no further purchasing power. At this point, the
market is at a peak. On the other hand, when people predict a downturn, they have already
sold out, at which point the market can only go up.
The contrarian generally focuses on turnaround situations and stocks currently out of favour
with low P/E ratios, practicing patience and long-term investing.
KeyStone’s Latest Reports Section
- Alternative Financial Services Provider Posts Record Q4 and Fiscal 2010 Revenue
& EPS, Aggressive Growth Plan Intact - Stock Rating Upgraded (Flash Update)
- Junior Gold/Copper Producer Sees Shares Surge on Positive Mine Report &
Strategic Debt Financing– Maintain Rating (Flash Update)
- Canada’s Leading Industrial Services Firm Posts Solid Q2 – Rating Maintained (Flash
Update)
- Hardware & Software Communications Micro-Cap With Strong Balance Sheet Posts
Top-line Growth, Bottom Line Hit by Currency – Maintain Rating (Flash Update)
- China-based Forestry Company Posted Solid Q1 2010, Rating Upgraded on Price
Decline (Flash Update)
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