How to make money with ten terrible stocks
This U.S. specialist in small cap stocks bought 10 of the least appealing stocks on the NYSE a year ago (one Canadian) and wound up a winner.
Here’s a recipe for success you may not have considered.
Buy 10 really awful stocks in the midst of a crushing bear market and hang on to them for a year. Does this sound inspired or just plain crazy?
Well this is exactly what one seasoned investor decided to do — and it produced an 85 per cent return.
The investor in question is Mr. Max Bowser, one of America’s leading exponents of small cap stocks, or microcaps.
Just over a year ago, he announced in The Bowser Report that he was trying a “noble experiment” — buying 10 stocks on the New York Stock Exchange that were trading at 75 cents a share or less.
We reported on the early stages of this experiment (see Daily Buy-Sell Adviser, April 20, 2009).
Now it’s time to see the bottom line on these stocks, known to this editor and his readers as “The Terrible Ten.”
Follow the plan
When Mr. Bowser first looked over the rubble of the market, there were 19 stocks on the NYSE trading under 75 cents. He narrowed the list down to 10. (One of them, by the way, is a Canadian company that was accustomed to good reviews earlier in this decade.)
He purchased the stocks on March 6, 2009. As we know now, the market hit bottom three days later.
Here is what he told his readers. “As a one-time venture, we suggest that you buy all 10 — 200 shares. Don’t guess which one will take off and then put all your funds in that one stock.”
He also suggested they follow his “Selling Plan.” This means selling half of one’s holdings when the stock doubles in price and selling the rest if the shares fall by 25 per cent or more.
The experiment is now complete. Following his game plan, Mr. Bowser has sold every one of the 10 stocks.
All but two of the stocks doubled in price. Some were sold quite some time ago. The last sale took place three weeks ago.
Terrible Ten scorecard
Here is the scorecard on the Terrible Ten, in alphabetical order. Mr. Bowser records the cost of buying 200 shares of each stock, including commissions, and the final proceeds. We give the share prices at the time we first covered them, and today.
No less than four of these stocks have actually moved from the NYSE to the “pink sheets” or Over the Counter bulletin board (“OTC”). None of them pays a dividend.
Alesco Financial (NYSE-AFN), a real estate investment trust, merged into Cohen & Co. (OTC-COHN) last December. The shares cost $93.43 and yielded $145.25 when they were sold. As the merger proceeded, there was a 1-for-10 reverse split (investors get 10 times fewer shares, but the price multiplies by 10). $0.45 in price last year, the new stock trades at $5.95.
Anthracite Capital (OTC-APCI), another real estate investment trust, also cost $93.43 and produced $159.78 when it was sold. It was $0.49 last year and is just $.0177 today (but it was sold almost 10 months ago).
Guaranty Financial (OTC-GFGFQ), a savings bank from Texas, is the big loser in the group. Bought for $117.55 and sold for $16.07, it filed for Chapter 11 bankruptcy last August. From $0.58, it is now $.028.
The Canadian entry is Intertape Polymer (TSX–ITP; OTC-ITPOF), the packaging and plastic specialist that once had a higher reputation among analysts and investors. It cost $105.49 and brought in a tidy $197.55. $3.41 last year, it is now $3.24 on the TSX.
Journal Communications (NYSE-JRN) was the big winner. Based in Milwaukee, this newspaper, radio, printing and direct mail firm cost a relatively expensive $317, but yielded a robust $710.00. $1.74 last April, it has climbed to $4.41.
LL&E Royalty Trust (OTC-LRTR) a petroleum royalty trust, cost $131.62 and brought in a modest gain at $142.24. From $0.57, it has also risen modestly in price to $0.80.
Nautilus (NYSE-NLS), the well-known fitness equipment maker, was bought for $207 and sold for $390.99. From $1.09, it’s now at $3.35.
Phoenix Companies (NYSE-PNX), a big insurance firm, cost the most at $335, but it brought in $609. From $1.94 last year, it is now $3.10.
Tech services firm Unisys Corp. (NYSE-UIS) is a notable name. It, too, had a 1-for-10 reverse split. It cost $251 to buy and brought in $559.63 when sold. $1.59 last year (before the split) it is $37.37 now.
Finally, coated paper specialist Verso Paper Corp. (NYSE-VRS) cost $135.64 and was sold for $373. It was $0.68 then, and it’s $4.31 now.
Rebound or cease to exist
Here’s the final tally. The total cost of buying these stocks, with commissions, was $1,787.16. The final proceeds from the sales amounted to $3.303.51. Total return: 85 per cent.
Back in 1939, a young John Templeton bought every stock on the New York exchange selling for less than $1.00. He actually borrowed $10,000 to help buy the shares of 104 companies — and 34 of those were bankrupt.
He held on for four years and quadrupled his purchase price. It was the founding of his enormous fortune and legendary reputation.
The returns from Mr. Bowser’s experiment will scarcely serve to found a great fortune. But it worked.
It was based on the simple premise that “the market would either rebound or cease to exist. We believed it would recover.”
Up to now, the market has always rebounded. And some hardy souls who are willing to start at the very bottom can come out on top.
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