Is the Penny Stock Rebound Too Good to Be True?

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If you like penny stocks (and judging by how many high impact stocks that have slipped into the penny stock range over the past 18 months … there are many of you), then the last month has been one of the best optimism or great pessimism.

From March 9 to April 9, the Dow Jones industrial average gained 23%, the S&P 500 rose 26% and the Nasdaq Composite rose 30%. Small cap stocks have outperformed large caps by a wide margin, with the Russell 2000 Index rising 36% over the same period. According to Howard Silverblatt of S&P, this is the strongest 23-day gain since 1933.

The recent appreciation in US stock prices has led an investment executive to say that the recovery is “too explosive to be sustainable.” According to Birinyi Associates, when small-cap stocks outperform large-cap stocks to this degree after bear markets, rallies collapse.

Will history repeat itself? Or will small cap stocks and pennies continue to rise?

From an article I was reading (and there are arguably ten times more that indicate otherwise) the pessimistic views seem to rest on one major assumption – that history is a good guide for the future.

And it often is. Except in cases where the story has little or nothing to offer for comparative analysis. While we’ve all lived to tell the story of the bear markets of the past, it’s been a while since we’ve seen anything like this last year.

In fact, it’s probably been a century since the economy experienced a sharp drop in the speed of money like it did last year. Since 1907, the American economy has not experienced a real panic like at the end of 2008.

Larry Summers, President Obama’s chief economic adviser, said the economy behaved like a bullet falling off the edge of a table in late 2008. Almost all of the major economic data, the article notes, look like the front half of a “V”. from around September.

Vehicle sales fell to well below the scrapping rate, while housing starts fell to just a third of the volume needed to keep up with fundamentals like population growth. The combination of a rapid decline in economic activity, an increase in foreclosures and defaults on mortgages as well as mark-to-market accounting has resulted in large losses in banks and panic sales of ‘actions.

If you believe some financial analysts, the economy and the market are only rebounding from the historically rare events of the past year.

If this is the case, and most of the stocks are down and trading at what appear to be bargain prices, how do we separate the penny stocks from the irritation? After all, even great penny stocks have seen investors overreact – causing their stock prices to drop at the table. But which penny stocks will rebound … and which rightly fall flat?

During a normal bearish run, markets correctly anticipate the value of many stocks and discount them accordingly. A 50% price cut is certainly a markdown, but it’s not a good deal if the company’s value has been cut in half, its business units are deteriorating, or if it was initially overvalued.

Last fall, investors hammered penny stocks in virtually every industry. The question is, which penny stocks underwent a justifiable correction and which were the result of an overreacting and mistaken emotional reaction?

Here are some penny stocks that you may be familiar with. As their stock prices fell last fall, it was financially strong companies that became collateral damage, weighed down by the sluggish market. And, unlike most penny stocks, their stock prices rebound.

Accelrys inc. (Nasdaq – ACCL) is a profitable and financially strong company with over $ 53 million in cash, a strong international presence and no long-term debt. Since the beginning of March, the ACCL share price has increased by 28.57%.

In early February, ACCL reported that third-quarter revenue increased 5% year-on-year to $ 20.6 million. Net income for the period was $ 1.01 million, or $ 0.04 per share, compared to a (loss) of ($ 1.23 million) or ($ 0.05) per share at the same time last year.

Californian micro-devices (Nasdaq – CAMD) is an innovative company with over $ 48 million in cash, no long-term debt and good long-term growth potential. Since the beginning of March, the CAMD share price has climbed 39.56%.

At the end of January, CAMD announced that the results for the third quarter of fiscal 2009 (ended December 31, 2008) reached revised guidance of $ 9.7 million. As demand for the company’s products has fallen sharply due to the weakening global economy, the company’s strong balance sheet will help it weather the current economic storm. CAMD expects the current inventory correction to be completed by mid-2009.

Art Technology Group, Inc. (Nasdaq – ARTG) is a profitable and financially strong company with over $ 59 million in cash, no long-term debt and improved operations. At the start of March, ARTG was trading as low as $ 1.95, and this week it hit an intra-day high of $ 2.96; for a short-term spread of 51.79%.

In March, ARTG announced that it had entered into two strategic partnerships. In early February, the company reported that fourth-quarter revenue increased 16% year-over-year to $ 45.4 million. Net income increased significantly to $ 3.5 million. Annual revenue increased 20% to $ 164.6 million. The company also achieved annual profitability of $ 3.8 million.

If the recent rally in small caps and penny stocks is viewed through the lens of recent history, then we can all expect the markets to pull back significantly. Given that the past 18 months have been anything but typical, it is difficult to frame the current optimism in the markets.

It’s entirely possible that some penny stocks will return to where they were last fall – before emotions kicked in and fell off the table. And it still gives shrewd penny stock investors some leeway before the real market rally begins.



Source by John Paul Whitefoot

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