Investor Caution: Indentifying the Next Penny Stocks (AMD, ALU, GERN, MTG, OCZ, OSG, RSH, RAD)

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Some companies are in real trouble. Some are under severe industry pressure, and some are just faltering due to missteps and bad luck. With the economy remaining weak and with the markets selling off since the election, the risks are mounting for many share prices. 24/7 Wall St. has reviewed and analyzed many companies, after initially reviewing hundreds of companies, to find out which stocks may become the next penny stocks.

To qualify as a penny stock, the formal criteria is that they have to trade under $1.00 per share. Some investors refer to stocks under $5.00 in the same light. In each of our screens and companies we have analyzed, the common themes that may seem obvious are serious trouble and weak business metrics. Some of these companies are large household names, while others are small and only known to a handful of investors.

What is interesting about troubled companies is that some may turn around. Those turnarounds could even be huge. Some may just stabilize or hold up as “less bad versus expectations,” and that could keep these from “breaking the buck.” Unfortunately, some of these companies already have traded under the $1.00 level in the past year, and a weakening stock market and weakening economy only add to the risks here. Some companies may even try the doomed move of a “reverse stock split” to avoid the penny stock status.

In each case we have outlined some basic issues that actually could save each of these companies. Some of the solutions are long shots, but the law of averages should come to the rescue for at least some of these troubled companies.

Advanced Micro Devices Inc. (NYSE: AMD) is caught in the middle of a death spiral. It is basically leaderless, and so far every new technological gain by AMD is somehow rapidly outpaced elsewhere. The fab-lite model has not helped, and AMD is going through major layoffs right now. Now that shares have fallen under $2.00, the risk is growing and growing. Its market cap is now down to only about $1.4 billion. Wall St. already is expecting a loss to be wider in 2013 over 2012, and it is looking for sales to decline more than 10% in 2013 after an expected drop of about 17% in 2012. At $1.98, the 52-week range is $1.96 to $8.35. What could save AMD: a sudden stumble by Intel Corp. (NASDAQ: INTC); resurfaced regulatory pressure on Intel; an ARM partnership for servers takes off; massive interest in low-priced Windows-based laptops and desktops.

Alcatel-Lucent S.A. (NYSE: ALU) is in serious trouble. The turnaround and restructuring just never ends. Now the company finds itself with a large debt maturity suddenly not so far away. It keeps moving from one-stop to more specialized markets, which carriers can slow down if demand softens. Alcatel is trying to shrink its way to success, and it has so far been unable to telegraph that it can unlock any real value from the Bell Labs patent portfolio that came along with Lucent in the merger. With a focus on specialized and advanced communications, other giants like Cisco Systems Inc. (NASDAQ: CSCO) can keep price pressure up to the point that margins remain suppressed (or worse). The ongoing situation in Europe is not helping its old core markets there either. At $1.10, its 52-week range is $0.91 to $2.66, and its market cap is only $2.7 billion. What can save Alcatel-Lucent: one of its forecasts and promises actually gets lived up to; restructuring efforts somehow work better than its historic efforts; increased focus on patents being successful; resurgence of growth in Latin America, China and Asia; a major stumble by Cisco or other key competitors.

Geron Corp. (NASDAQ: GERN) was once the poster child of what stem cell research should be. Now it is hard to describe Geron since it has been a year since the company announced the discontinuation of its stem cell business. BioTime Inc. (NYSEMKT: BTX) has offered Geron a buyout offer for its stem cell lines, but this remains an unknown issue. It also recently discontinued a breast cancer study. Many troubled biotech and emerging biohealth players find their shares close to book value or under due to expected losses, and if that occurs here the stock easily has more room to fall. At $1.28, the 52-week trading range is $1.21 to $2.99, and the market value is only $167 million. What can save Geron: a new development pact; a new discovery; continued lower losses; BioTime success in offer to shareholders; possible offer going from asset buy to whole company purchase.

MGIC Investment Corp. (NYSE: MTG) remains challenged, and the stock has fallen 15% from the end of October. Mortgage claim costs may not be going away any time soon, and the tentative Freddie Mac settlement already has come and gone as far as the share price is concerned. A softening economy is now a risk all over again to this insurer. While its book value is still twice its share price, this one keeps losing money and revenues are expected to continue declining. At $1.68, its 52-week range is $0.66 to $5.15. It has been a penny stock before, and not that long ago. What could save MGIC: amnesty from legacy liabilities; government assistance for insurers to keep housing going; favorable court rulings; further resolution of Fannie/Freddie issues.

OCZ Technology Group Inc. (NASDAQ: OCZ) was supposed to be a winner because of the growth potential in solid state drives and other components. The problem is that the revenue model can no longer be relied upon. OCZ’s earnings situation has become a disaster and the company now cannot properly handle its SEC filings. It has even tried layoffs. Many law firms have initiated class actions or investigations here. The company trades under book value, but it has no guidance now and the few analysts that follow it expect losses of $0.70 per share for 2012 and $0.13 per share for 2013. The losses are mounting and that management “shake-up” was less than comforting. At $1.31, its 52-week week range is $1.23 to $10.05, and its market value is now only $88 million. What can save OCZ: A turnaround success; a low-ball buyout offer; clarity in its guidance and in its quarterly filings; sudden increased customer attention.

Overseas Shipholding Group Inc. (NYSE: OSG) has been a total disaster, and the company has a growing list of class-action efforts, including investigations for class actions. The company itself has even warned that it may file for bankruptcy protection over tax issues (and weak business) as its credit line is out and coming due soon. The death spiral we saw has left this one with a market cap of only $44 million, and the oil shipper is expected to post wide per-share losses of $6.88 in 2012 and $4.38 in 2013. At $1.44, its 52-week range is $1.02 to $15.16. What could save the company: international domicile; resurgence of oil shipments; renegotiated shipping terms; a bottom-fish private equity or ship buyer.

RadioShack Corp. (NYSE: RSH) is now barely a $2 stock, and its market cap is down to $210 million. Nothing works for this retailer, and even rival Best Buy Co. Inc. (NYSE: BBY) is in trouble. RadioShack is still under an interim CEO, and the bleeding has become monumental here. RadioShack is expected to lose money in the coming Christmas quarter, as well as to lose money this year and next in virtually no sales growth for 2013. It is unfortunate, but this retailer just has not been able to catch a break. What could save it: overseas growth initiatives underway in emerging Pacific markets; hot new consumer electronics; great CEO replacement; total bottom-fishing buyout offer; decision to unlock the balance sheet to distribute the book value surplus as a return of capital and then an even leaner model.

Rite Aid Corp. (NYSE: RAD) is still dangerously close to the $1.00 mark. Each gain seems to be incremental only, and each gain seems to be short-lived. The 1990s model that the retailer thrived under now has much wider competition, and the corner drug store is not as necessary as it was in the 1990s. Even if Rite Aid holds steady in its core business, a strong market sell-off alone could take this one back into penny-stock land. At $1.09, its 52-week range is $1.05 to $2.12. Things got so bad during the recession that Rite Aid shares went under $0.40 at the peak of selling during the recession. What could save Rite Aid: a recapitalization that leaves shareholders alive; an unknown exclusive relationship; a white knight.

Before thinking that any of these names are too great or have too much history, it is important to realize the history of companies that get overtaken by their industry or where they just become obsolete through time. Blockbuster, Lehman Bros., Eastman Kodak, A123, AMR, Fannie Mae, Freddie Mac, Nortel, MF Global, Borders and many others were all once great stocks.

JON C. OGG

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