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Playing Penny-Stock Roulette


Isaac Brekken for The New York Times
John L. Kingery, left, with Andrew Kaplan, chief financial officer of Audible Inc., at the Mirage in Las Vegas. They were celebrating with fellow risk takers who invested in the company when it was a penny stock.


By GARY RIVLIN

Published: January 23, 2005




Chart: Rising From the Ashes...or Still Smoldering

Isaac Brekken for The New York Times
Donald R. Katz, right, Audible's founder, and William T. Katz. The men, who are not related, held firm as the stock fell and rebounded.




as Vegas

HIS hair is white and stringy, his beard thick and snowy in the fashion of a hermit who decided long ago to park himself high atop a mountain. He's a touch shy, a self-deprecating man who describes himself as never before lucky in life.

John L. Kingery knows that he is not the sort you would expect to find here sipping a cocktail inside a high-roller suite at the Mirage. Nor were most of the 15 or so others who descended on the hotel this month to toast their collective wisdom - and the millions they had collectively made - in buying shares of Audible Inc., an Internet stock so beaten down that for a time it could be found only in the netherworld of penny-stock trading boards.

Their choice of place could not have been more apt. Mr. Kingery and his fellow travelers, who included a lieutenant colonel stationed inside the Pentagon, a semiretired 26-year-old and a part-time science fiction writer, had each placed wagers as large and as bold as most people who usually inhabit these suites.

The last few years have been a banner time for those inclined to play penny stocks, if only because there are so many of them. A record number of companies have been delisted since the market began its collapse in the spring of 2000, perhaps an outgrowth of the record number of companies that went public during the 1990's. The Nasdaq alone banished nearly 1,100 companies from 1999 to 2002, stamping them as damaged goods because they either failed to meet minimum financial standards or violated Securities and Exchange Commission policy - or both.

Like others who study penny stocks, James J. Angel, a professor of finance at the McDonough School of Business at Georgetown University, cast them as treacherous grounds, offering odds barely better than those of a roulette wheel. Yet, as the story of Audible and its faithful show, risky investing by amateurs does not seem to have perished along with the likes of Pets.com and other dot-com flameouts.

Penny stocks come in several forms. They include those, like Audible, that the Nasdaq tossed off its primary exchange when they fell short in a set of financial tests, though they could be traded on Nasdaq's bulletin board because they remained current in their S.E.C. filings. Then there are the ones kicked off the Nasdaq or the New York Stock Exchange whose filings are not current. Those are traded on the over-the-counter market known as the pink sheets.

"Basically 95 out of 100 of these companies end up dead," Professor Angel said. "If you look three years out, you'll see that very few of them rise like a phoenix from the ashes." That figure does not include those penny stocks that were never listed on one of the major exchanges, either because they couldn't make the cut or because they "didn't want to bow down to the authorities" at the S.E.C., Professor Angel said.

Audible, which lets people download audio books and other material via the Internet, had a typical rise and fall, then a not-so-typical rebound. The company, based in Wayne, N.J., is again trading on the Nasdaq. Its stock, which soared to $21 a share on its first day of trading in 1999 from an opening price of $15.25, hit a low of 15 cents in February 2003 - all before a reverse 3-for-1 stock split in June 2004.

But as the company approached a split-adjusted $10 a share late last year, a group of Audible investors decided that a celebration was in order, and they met at the Mirage. Previously, they had communicated exclusively through postings on an Internet site created by one of their own. (The stock now trades at $25.47, or a split-adjusted $8.49.)

PERHAPS the biggest surprise to be found inside that high-rollers suite wasn't that a penny stock had created a small cadre of big winners. Rather, it was the willingness of this group of true believers to behave so recklessly, despite all those billions lost by investors four years ago.

Consider Keith Chadwell, the director of data services at a company in Greenville, S.C.. He told his fellow investors that he believed so enthusiastically in Audible.com - he figures he has downloaded and listened to 350 books in the past five years - that he invested all of his savings in it, then set aside half of his take-home pay each week for a year to buy more.

Another Audible groupie, Peter Graetz, a computer consultant based in Düsseldorf, Germany, said he had liquidated all of his other stock holdings to buy more shares. "I was the crazy guy of the group," said Mr. Graetz, who had logged 33 hours on airplanes and in airports traveling here from Germany for the celebration. "I was 100 percent Audible."

Mr. Kingery might have been even rasher. He said he bought a large portion of his shares on margin - borrowed money.CONT.-
http://www.nytimes.com/2005/01/23/business/yourmoney/23penny.html