Brand-Name Stocks You Can -- But Shouldn't -- Buy for Pennies

Denny's (DENN). Talbots (TLB). Coldwater Creek (CWTR). You see these established companies all the time, whether at the mall, on your daily commute, or in catalogs delivered to your mailbox. And for less than a cup of coffee, you can actually buy shares of each of their stock. Alas, that doesn't mean you ought to.

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.

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19 Comments

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MZymr

I am looking at the Talbots stock. My wife would buy most of her clothes at Talbot's. It was always high quality clothes priced at a fairly reasonable price. if I am not mistaken it was around 2005 or 06 that they started having their clothes made in China. The result was inferior quality ill fitting garments. Many garments were poorly stitched together..Not the correct sizes on some garments. Yet they kept the prices up there. Prices were not reduced for the inferior quality clothes.So Talbot's fooled the public for a while. But then the public wised up. Women are astute buyers they know quality clothes from junk. So now we see the end result.. My wife had many friends that would buy at Talbot's. They have stopped shopping there also. Talbots has caused their own problems.

December 03 2011 at 3:51 PM Report abuse rate up rate down Reply
daballofire

The stock markets fell about 5% today in Europe so watch out below - the Obama crash has and will not stop until the all talk no do Jive Turkey is plucked bare.

September 05 2011 at 6:29 PM Report abuse rate up rate down Reply
kob1955

Cheap stocks are like betting a horse. Sometimes the long shot wins! Keep the bet small.

September 05 2011 at 6:05 PM Report abuse rate up rate down Reply
mily469

i never was interested in buying stocks. just never seemed worth it.

September 05 2011 at 2:28 PM Report abuse rate up rate down Reply
1 reply to mily469's comment
daballofire

I know what you mean. You would rather someone else buy them for you .

September 05 2011 at 3:19 PM Report abuse rate up rate down Reply
snowhawk20

Good article. You can add Granite City Brewery to the list as well.

September 05 2011 at 4:09 AM Report abuse rate up rate down Reply
wayne

well i would start by stoping nafta then jobs well come back .

September 04 2011 at 7:05 PM Report abuse rate up rate down Reply
1 reply to wayne's comment
daballofire

Those NAFTA jobs left Mexico long ago because the Mexican workers wanted too much money to work, didnlt work very hard and they have labor unions that messed it up. No problems in China, Indonesia and Vietnam.

September 05 2011 at 3:22 PM Report abuse rate up rate down Reply
ronkn6

The only way the U.S.A is going to reastablish itself is to bring GOD ,HIS ONLY BEGOTEN SON JESUS CHRIST,back into our SCHOOLS,HOMES ,GOVERNMENT and DAILY LIVING..I SUGGEST WE ALL TRULY PRAY ,WRITE TEACH ,AND LIVE AS OUR BIBLE SAYS TO DO!!!DAVID BARTON (A GODLY MAN FROM TEXAS) HAS A WEB-SITE I KNOW FULL OF VITAL HISTORY ABOUT OUR COUNTRIES FOUNDING FATHERS LIVES. I CAN CONTINUE TO PRAY ,FOR ALL PEOPLE ,AND THE FIRST THING WE AS A NATION NEED TO DO IS TO GET RID OF IS THE AMERICAN CIVIL LIBERTIES UNION,GOD BLESS AMERICA AND ISRAEL!!!!!!!!

September 04 2011 at 5:35 PM Report abuse -2 rate up rate down Reply
Yo, Braddah

This writer does not know what she is talking about. None of these stocks are considered "penny stocks" either under common definition or under the definition per the Security & Exchange Act sec. 3(a)(51). Price is not the single determining factor. Market capitalization, number of outstanding shares, bid/ask spreads, where the stock is traded, revenue, shareholder equity, and a bunch of other factors define a stock as a penny stock or not. Generrally stocks under $5 cause restrictions for certain but not all mutual funds and institutional investors to hold the stock in their portfolio. Stocks under $1 are generally sent a de-listing notice and if not cured then are de-listed and only trade on the OTCBB. That all being said, CWTR & TLB are dead money. DENN is a solid company with a great franchise. Scheduled to open 75 new stores in 2011. Dying companies don't open new stores - can't get the financing.

September 04 2011 at 2:19 PM Report abuse -1 rate up rate down Reply
MZymr

Penny stocks. From the boiler room. Pump them up and Dump them

September 04 2011 at 1:06 PM Report abuse rate up rate down Reply
MZymr

The problem with Talbot's is most of their clothes is made in China and is of inferior quality and workmanship. For years my wife bought her clothes at Talbot's. The quality was excellent along with the workmanship. The well dressed upper middle class professional does not shop at Talbot's and has not for the last 6 or more years. Woman know quality clothes and are willing to pay for it. Talbot's quality since it's made in China has gone down hill.

September 04 2011 at 1:05 PM Report abuse +1 rate up rate down Reply
1 reply to MZymr's comment
rosugill

You are correct, but your English is rock bottom. It needs to go uphill a lot.

September 05 2011 at 10:17 AM Report abuse -1 rate up rate down Reply