Dear Mr. Berko: I have $12,000 that I want to invest in several speculative stocks that trade under $12 a share and that could appreciate by 50 percent or more in the coming 12 months. Give me your best shot and I won’t blame you if your recommendations go south on me.
— B.E., Erie, Pa.
I don’t have a “best shot.” I know very little about low-priced stocks, but I know enough to tell you that the primary reason low-priced stocks are cheap is that’s all they’re worth. The share price of every low-priced stock is determined by two factors: the consensus of investors who believe that the company has an attractive future and are buying the shares and the consensus of investors who don’t believe that the company’s future looks attractive and are selling the shares. But every once in a while, there is a sharp-eyed professional who claims he has X-ray vision that allows him to see golden nuggets that are not apparent to less-skilled investors. Sir Melgrove Smythe, who hails from the English village of Crackpot in North Yorkshire and just returned from Guam after waiting for the war to end, may be among the few who possess such skills.
Sir Melgrove believes that Alcoa (AA-$9.93) could return to $17, where it traded in January of this year. A $24 billion-revenue company, AA is a global leader in the production of lightweight metals, including aluminum, titanium and nickel. These metals are used in aircraft, automobiles, commercial transportation, construction and packaging and have numerous industrial applications. Sir Melgrove expects earnings to fall by 20 percent this year, to 75 cents a share. But in 2016, with revenues of $25.1 billion, AA could earn $1 a share. It has a book value of $12.20 and a 12-cent dividend. Analysts at Vanguard, J.P. Morgan, State Street and BlackRock are also believers and own more than 250 million shares. And CEO Klaus Kleinfeld, who owns 1.9 million shares of AA, may also be a believer. I’m not.
Sir Melgrove is enthusiastic about CTI BioPharma (CTIC-$1.63), which makes me think this chap may have lost a few marbles. This $60 million-revenue, 132-employee biotech company traded in the mid-$70s in October 2000 and subsequently had four reverse splits — a 1-for-4 split in 2007, a 1-for-10 split in 2008, a 1-for-6 split in 2011 and a 1-for-5 split in 2012. CTIC is engaged in the development and commercialization of novel therapies for blood-related cancers. Several CTIC-watchers believe that clinical trials for several CTIC drugs will present positive results. And the five analysts who follow CTIC believe that the shares could trade within a target range of $3.50 to $8 by 2016. I doubt it.
