Low-Priced Stocks Rarely Provide Actual Bargains

...I wanted to share an article I read in IBD earlier today. I couldn't agree more with the author so I decided to post her words rather than re-write what she has written so perfectly. I have no problem buying stocks between $10 and $25 but as most of you know, my recent success has come from stocks priced above $60 and a few making a run from $20 to $40.

BY CHRISTINA WISE
INVESTOR'S BUSINESS DAILY
www.investors.com

People are drawn to bargains like moths to a flame.

It's the reason Kmart has Blue Light Specials and Wal-Mart (WMT) touts its price rollbacks.

But when it comes to investing, all too often you get what you pay for.

Though it might be tempting to snatch up 1,000 shares of a stock priced at just a few cents or a few dollars a share, these companies often aren't the market's best performers.

For one thing, there's usually a reason a stock is trading at rock-bottom prices. The company's profits could be disappointing or nonexistent; its product may not sell; or the firm itself may be tiny, with a minuscule market share.

Large investors such as mutual funds, pension funds and insurance companies tend to steer clear of cheap stocks since they can't buy large positions without sending the stock's price flying.

As a result, low-priced stocks are often thinly traded, which can make them more prone to wild price swings. Since you want to cut losses at no more than 7% to 8% from a buy point, a loss of a few cents could knock you out almost immediately.

Another risk in buying cheap stocks is that if the share price falls far enough, the stock could be delisted and bumped from the exchange. Or the company itself might go out of business, making your investment even more difficult to cash in.

Besides, at the end of the day, the return you make on your stock investment is based on the percentage gain or loss the stock makes — not on the number of shares you have.

A better strategy is to focus on stocks priced $10 a share or higher. Your investment candidates should also have solid earnings and sales track records. The stock market tends to reward strong fundamentals as signs of leadership.

Though a stock that's fallen well below its former highs may look like a bargain, remember: There's probably a good reason it's trading so low. Instead, focus on stocks that have already worked their way through a base and are poised to move to higher ground.