While many of Orange County’s top stocks are in the doldrums, shares in the lowest-priced public companies based here had an eye-catching bounce in the past month or so.
Shares of many OC companies that had tanked in 2000 and particularly in December made a relative comeback in January, with the prices of some stocks rising by as much as 300% or more.
Of course, many of these shares had nowhere to go but up. And even after a brief run-up, most still are cheaper than a cup of Diedrich coffee. But for those who play cheap stocks, the recent bounce is notable.
“This year, the opportunity (to make money) was much more, with some stocks doubling and tripling,” said Don Whitaker, an independent arbitrageur in Irvine.
In all, OC stocks priced at 5 and below gained 57% in the period from Dec. 29 through Jan. 24, according to Newport Beach-based Roth Capital Partners Inc. The average price of OC 100 index stocks rose 36% during the same period, while Nasdaq issues were up 16%. The Dow Jones Industrial Average fell marginally in the past month, while the Standard & Poor’s 500 index was up by 3% in the same period.
But the sharp rise among OC stocks had little to do with improving fundamentals or changing fortunes of beaten-down companies. The rise, instead, had more to do with year-end tax planning.
“Such a bounce-back is pretty common every year,” said Whitaker, who also is president of trading and arbitrage firm DCW Inc.
For tax purposes, investors in December often unload stocks that have suffered losses to offset gains in other shares. Increased selling and less buying in December drifts stocks with low market capitalizations to lower levels. When the selling subsides in January, stocks tend to snap back sharply.
“Anything that is thrown down real hard bounces back quickly,” said Whitaker.
In many cases, though, the outlook for the company is no better than it was a few weeks ago.
“The rise had nothing to do with improving fundamentals,” said Kurt Stabel, chief investment officer of Newport Beach-based Street Asset Management LLC.
In fact, Stabel said, “Fundamentals for small companies have probably deteriorated in January. It’s all liquidity play.”
Shares in NQL Inc., a business-to-business e-commerce company based in Costa Mesa, rose 388% in the past month. The stock rose from 56 cents a share Dec. 29 to 2 3/4 a share Jan. 24. The stock’s 52-week high of around 11 was set in the spring.
Another penny stock, that of Aliso Viejo-based software maker Smith Micro Software Inc., was up almost 240% on Jan. 24 from its Dec. 29 close. The stock rose from 90 cents to around 3.
Tickets.com Inc. of Costa Mesa was the third-biggest gainer in the four-week period. Its shares were traded at 78 cents on Jan. 24, up 177% from its close of 28 cents on Dec. 29.
Whitaker has been playing the penny-stock bounce since 1959. He buys stocks in the last two weeks of December and sells them back in the first and the second week of January, netting some easy but smart profits. He said that within this four-week period a trader could make a 10% to 15% return.
While the year-end sell-off takes place like clockwork, the ensuing bounce back varies, Whitaker said, noting that this year’s was exceptional.
So what was different this time? Mainly the sharp and across-the-board rise in penny and low-priced stocks.
“Some stocks rose very sharply this year,” he said.
Out of 100 stocks from the former OC 100 index, 81 rose, while only 18 were down.
All the companies in the OC 100 are small to mid-size firms with market capitalizations less than $1 billion. Stocks of 52 companies in the OC 100 were trading below 5 on Dec. 29. The average price of these 52 companies was up 57% in the four-week period.
“The 2000 period was a spectacular opportunity for an arbitrageur,” Whitaker said. “Some years are better than others.”
Since most of the selling in December takes place in stocks that are down for the year, it also means that in good market years there may not be as many stocks that investors will be able to sell to take tax advantage.
In December 1999, for instance, stocks did not fall dramatically and the subsequent January rise was not that sharp.
“There was no tax-loss sell-off because almost all stocks were up,” Street Asset’s Stabel said. “That made this year’s sell-off even more intense.” n
