There is something about a stock that trades in the single digits that gets the speculative juices flowing. I know this first hand since I have been guilty of doing this in the past. A lot of people have dreams of picking up a stock for a few bucks a share and watching it soar 200x to become the next Microsoft. This is the stuff that stock market dreams are made of.
Boulevard of Broken Dreams
Unfortunately, reality plays out differently a vast majority of the time. You don’t hear too many stories about the guy who bought that $4 stock and watched it fall to $0 as it was discovered to be a fraud or went belly up. This is a much more likely scenario than watching it becoming a ten bagger. The point is that these stocks are in the single digits for a reason.
It is unlikely that you will find a low-priced stock that is benefiting from excellent fundamentals. For one reason or the other, the market is skeptical about the future growth prospects or earning power of the company; either that or there is some other cloud hanging over the company that is difficult to lift.
Big Boys Stay Away
Another issue facing single-digit stocks is the lack of institutional ownership. Most big investment companies do not buy stocks that trade under $5 and are hesitant to own anything under $10. These are the big fish that control a lot of the action in the stock market, so it is difficult for these stocks to move up with only the little guys playing them. Sometimes message board rumors that are only read by smaller investors have a disproportionate effect on the price of low-dollar stocks for this reason.
I know I mentioned a $5 stock called China Marine Food (CMFO) a few weeks ago saying it was my favorite small cap. I still think it has great growth prospects, but I may have underestimated the market’s distaste for any small cap Chinese stocks. They have the reputation of having dodgy accounting standards and some are outright frauds. It will take several quarters for investors to start having faith in them, but it should happen if they can show transparency and consistency in reporting.
I am not saying you should never buy a low-priced stock, but extra due diligence is needed. Ask yourself why it is trading at such a level. You should also remember that low price doesn’t equal cheap. A stock trading at $100 can be dirt cheap while a $3 stock can be astronomically expensive. It all depends on earnings and cash flows rather than the nominal stock price. Basically my advice is to find stocks that are attractive fundamentally, not necessarily low priced.
Beware Low Priced Stocks is an article from: 
