Fire Sale Prices May Burn Some 'Dot-Com' Stocks
By WALTER HAMILTON, Times Staff Writer
The stock market's brutal sell-off in the last month has saddled some battered "dot-com" companies with an ironic new problem: On top of their many other worries, the fact that their stocks have sunk to such low levels may itself keep the share prices from rebounding.
A large number of Internet shares have tumbled to "penny-stock" status of $5 or less--a level at which institutions such as mutual funds won't even consider buying them. And without the backing of mutual funds and pension funds, whose enormous sums generally provide a stock's greatest fuel, the shares face one more obstacle to recapturing their former glory.
Of the 318 dot-com stocks that have gone public since the beginning of 1998, 55, or more than 17%, trade for $5 or less, according to Thomson Financial/Securities Data. And 16% trade for between $5 and $10.
The ranks of dot-com penny stocks now include such well-known names as Drkoop.com and Theglobe.com, which made news in late 1998 with a spectacular first-day trading gain.
"Definitely, the price does have an impact on whether institutional investors will buy the stock," said John Faig, Internet analyst at the American Express mutual fund group. "A stock that's under $20 is a cause for concern. [If it's] under $10 it's in the stock graveyard."
Statistics show that institutions have been heavy sellers of dot-com firms in the last year, with individuals hopping aboard in their place. To some experts, "dumb money" is buying as "smart money" is fleeing.
Institutions make up 70% to 75% of the typical shareholder base when companies first sell stock in initial public offerings, said Chris Taylor, a director at Citigate Dewe Rogerson, a New York-based financial communications firm. But at year-end, data show that institutions held no more than 20% to 30% of many smaller dot-coms. And, experts say, institutional ownership is likely to have dropped further this year as tech stocks have plummeted.
"Since the time of the IPOs, institutions appear to have been significant net sellers of this group of companies, and individual investors now own the majority" of the shares, Taylor said.
A year ago, Internet companies--particularly e-commerce plays--were the toast of the stock market as investors giddily disregarded their lack of earnings.
But sentiment has shifted so dramatically that many investors now doubt whether most companies can turn a profit--or even stay in business. Indeed, auditors for well-known Web companies such as Drkoop.com and Value America warned recently that the companies' survival is in "substantial doubt."
For some companies that already had been locked in a downward spiral, the recent technology sector sell-off has officially pushed them into penny-stock terrain.
For example, Cyberian Outpost, BiznessOnline.com and 1-800-Flowers.com all have slipped to less than $5 in the last week or so. The market's partial rebound early this week helped EToys and several others pop back above that level.
At such depressed levels, it could be very difficult for the companies to raise capital via new stock sales.
Of course, some firms appear to have enough cash to keep going for the foreseeable future. Theglobe.com, which completed a secondary offering in May 1999 following its November 1998 IPO, lists almost $56 million in cash and short-term securities. Fashionmall.com reports almost $42 million.
Still, having a low-priced stock can become self-perpetuating. Though few institutions have explicit prohibitions against buying penny stocks, many say they simply don't bother to look at them.
A share price under $10--a "single-digit midget," in the words of newsletter writer Fred Hickey--is a big red flag to institutions because it shows the low regard with which Wall Street views the stock.
"Good fundamental companies with strong and well-run businesses rarely sell for $10 a share, much less $5 a share," said Bill Koehler, head of investment oversight at American Century mutual funds. "We spend so little time focusing on things like penny stocks that it's not even in our lexicon."
Many institutional investors have taken a path on dot-coms similar to Fritz Reynolds'. The head of the San Francisco-based Reynolds fund group bought 2,000 shares of Theglobe.com early last year, figuring that if the company blossomed into a big player he would have a toehold. He often uses that strategy, and it has paid off with stocks such as Microsoft.
But Reynolds dumped the shares later in the year after the stock foundered. "Along the way, you find ones that you don't want to own, and Theglobe.com fits in that category," he said.
Jennifer Zwiebel, a spokeswoman for Theglobe.com, said the company expects the stock will rebound if it is able to become profitable in the next two years. "I don't think there's any concern" about the falling stock price, she said. "It's about building the business and proving it."
Making matters worse for dot-coms, some brokerages don't recommend penny stocks to clients.
Edward Jones in St. Louis, for example, bars brokers from recommending stocks priced at less than $4 and won't pay brokers commissions on the sales even if they are done at a customer's request, said Alan Skrainka, the firm's chief market strategist.
Mutual funds also are hesitant to buy penny stocks because their market values are so small that they don't have a significant effect on a large portfolio, said Bob Grandhi, chief investment officer at the Monument fund group.
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'Dot-Coms' for Pennies
Shares of many once-promising Internet firms now trade for less than $5 a share, while others are at risk of falling below that threshold.
Already Below $5
Ticker 52-week Thurs. Pctg. Instit.
Company symbol high close decline ownership*
Drkoop.com KOOP $45.75 $2.50 -95% 22%
Value America VUSA 43.25 2.00 -95 34
E-Loan EELN 74.38 4.44 -94 30
Theglobe.com TGLO 34.94 3.56 -90 23
PlanetRx.com PLRX 36.50 3.56 -90 21
Fashionmall.com FASH 15.88 2.66 -83 11
1-800-Flowers.com FLWS 23.19 4.50 -81 46
Salon.com SALN 15.13 3.00 -80 23
Headed for Penny Stock Status?
Ticker 52-week Thurs. Pctg. Instit.
Company symbol high close decline ownership*
EToys ETYS 86.00 6.00 -93 27
TheStreet.com TSCM 71.25 7.06 -90 50
Webvan Group WBVN 34.00 5.75 -83 19
Barnesandnoble.com BNBN 26.63 8.56 -68 29
* Institutional ownership as a percentage of "float," the number of shares in public domain that are available to be traded; as of December 1999
Sources: Thomson Financial/Securities Data, Bloomberg News, Market Guide, Vickers, Citigate Dewe Rogerson |
