These are penny stocks, defined as stocks that trade for less than $5 per share. To some investors, they might look "cheap." They could even seem like deep values. But this is one area of investing you should pass up.
Don't be Blinded by a Low Price
It takes more than a low price tag to make a true bargain stock.
Most penny stocks plunged to those levels for very real reasons -- reasons you'll only discover if you dig deeper and look into price-to-earnings multiples, past growth and growth expectations, brand strength, and debt loads. See for yourself below.
Why You Should Give Coldwater the Cold Shoulder
Coldwater Creek's shares closed at $0.89 apiece last night, but they're trading at less than a buck for a reason.
The retailer's second-quarter results revealed a huge loss of $27.7 million, or $0.30 per share, compared to a profit of $1.5 million, or $0.02 per share this time last year. Total sales fell 28% in the quarter, and premium same-store sales plunged by 30.6%.
Even worse, Coldwater Creek's gross margins disintegrated to 25% of sales, from 33.4% of sales this time last year. Expenses related to retail occupancy costs and higher levels of markdowns on its merchandise contributed to that massive loss.
Talbots' Tarnished Brand
Talbots' shares ended the trading session yesterday at $2.67 per share. That may sound cheap compared to retail stocks like Urban Outfitters (URBN), but don't be fooled: Talbots has been trying to turn around its frumpy business for years now. The retailer finally reversed its annual string of losses by reporting an $0.11-per-share profit in the year ended January 2011, but it's not back on the runway yet.
This company hasn't reported an annual sales increase since the year ended January 2006. That's an awfully long time, and in this tough economy, it's hard to imagine that Talbots will be able to revive its business after so many floundering years. A tarnished brand isn't easy to polish again, especially after you've disappointed customers for so long.
Denny's Heaping Portion of Debt
Denny's is another well-known consumer name with a tiny stock price; it closed at $3.65 per share yesterday. Like the other two stores mentioned above, this diner chain has suffered through years on end of sales decreases. It last increased total sales in 2006, and then only by an anemic 1.6%. It's also got a heaping helping of debt on its plate; its total debt-to-capital ratio in the last 12 months was 170.4%. Ditch Denny's from your menu.
A Charming Disappointment
Charming Shoppes (CHRS) has lost its charm; it closed at $2.93 per share. The company that runs shops like Fashion Bug and Lane Bryant shocked everybody when it reported its most recent quarter, revealing a loss instead of the profit analysts had expected.
The situation is so ugly that Charming Shoppes now plans to close 120 stores in the second half of this year, after having closed 114 stores last quarter. These mostly affect its flagging Fashion Bug brand. Charming Shoppes hasn't reported an annual profit since the year ended February 2007; it's doubtful it can turn on the charm in today's tough economy.
Such companies can wreak havoc in investors' portfolios. So resist temptation to buy "cheap," familiar penny stocks.
Motley Fool analyst Alyce Lomax does not own shares of any of the companies mentioned.