Sensibility for penny stocks

Most people know Las Vegas has penny slots, but fewer may know that Las Vegas also has penny stocks.

Sixteen publicly traded stocks selling for between a penny and a dime per share offer a low-cost way to own a piece of a company based in the Las Vegas Valley. Four more stocks trade for between a dime and a dollar per share.

Of course, Las Vegas is also home to some large companies with higher-priced stock, like Wynn Resorts Ltd. at $182 per share as of Wednesday’s market close and Las Vegas Sands Corp. at $61.24 as of Wednesday’s close.

But today we’re focused on penny stocks.

Wall Street has always advised investors not to buy penny stocks. But the reality is any stock can go up and any stock can go down. Several years ago, IBM Corp., the granddaddy of blue-chip stocks, dropped from $126 per share to $64. Polaroid fell from $140 to $14 and Lucent Tech dropped from $72 to 55 cents per share. So much for blue chips.

Good investments come in all sizes and the best place to start looking is right in your own hometown.

At last count, there were 53 publicly traded companies calling the Las Vegas area home. Some are familiar names like MGM Resorts International and Boyd Gaming Corp. But most of us pass by less-well-known publicly traded companies without even knowing it. Many are small, meaning if you stop by to get some basic investor information, you might end up talking with one of the officers.

Evaluating public companies takes work. Maybe some friends share an interest and can split the work. Maybe would-be investors can form an investment club for research, thereby spreading the workload and getting different points of view.

Fundamentally, investors are looking for something that is not obvious that makes a stock go up. Don’t start research with preconceived notions; what you are looking at may not be what you think it is.

Research starts with looking at revenue, earnings, dividend and the number of shares. Look at the footnotes in the annual report. Understand what the company does and where it makes its money. Even if the information is mostly negative, don’t stop looking. Savvy investors find what everyone else overlooked.

Penny stocks will prove to be the most frustrating research because most of the companies look as if they are going out of business. But looks can be deceiving.

Several years ago, a Las Vegas company most had never heard of went from 7 cents per share on a Monday to 78 cents a share on a Tuesday. That was Broadcast Marketing.

Then there’s Investment Properties Associates, a company that owned office buildings in several cities. For several years, it had traded at about 75 cents per share. It looked terrible — it had heavy debt and vacancies and was losing money. Most investors rejected the stock. Then, one day, Investment Properties Associates declared a dividend. One year, that dividend was $9 per share. The price kept climbing to about $150 before the company liquidated.

Wins like these don’t happen often. But the chance of stumbling into such an investment is a powerful motivator.

A word of caution: Beware of the crowd mentality. If everyone is doing it, you’re probably too late. If no one is doing it, take a closer look. Have patience. And remember that big scores take courage, even if you can buy a million shares of a subpenny stock for a few thousand dollars.

Don’t look for help from your stock broker. Many firms prohibit recommending or even taking orders in penny stocks.

And keep in mind the 3Rs. No, not reading, ’riting and ’rithmatic. Think risk, reward and ratio.

What is the reward potential and what is the risk exposure. If the profit potential is relatively small, the risk is not worth it. The risk is almost always 100 percent — the loss of your entire investment. So if you determine the reward potential is only 100 percent, the 1-1 ratio tells us we can do better elsewhere. But if you feel the downside is, say, 24 percent and the upside is 100, you have a decent risk-reward ratio

We won’t be recommending stocks in this column, but we will be learning more about local publicly traded companies.

Three local penny stocks offer a good laboratory for this kind of evaluation — Amerityre Corp. (ticker: AMTY) in Boulder City at 8 cents per share at Wednesday’s close; Rimrock Gold Corp. (RMRK) on Lindell Road at 4 cents on Wednesday; and Hemp Inc. (HEMP) on Cimarron Road at about 3 cents per share.

Interested in the challenge of researching these companies? The first four readers who write me about what they find will receive a free copy of my book “Anatomy of a Stock Market Killing.” Send your notes to my editor, Norm Bell, at nbell@lvbusinesspress.com.

John Glushko is a retired stockbroker, a private investor and author of books and articles on investing. He lives in Las Vegas. His column will appear occasionally.