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Has this been posted? it's a great story that sounds a lot like one that could eventually be ours...









Playing Penny-Stock Roulette

January 23, 2005
By GARY RIVLIN





Las 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.

As any student of the stock market knows, the riskiest
investments are those that offer the greatest payout. Mr.
Graetz would not share all the details of his investment,
but did say that the stock was now worth more than 10 times
what he had paid. Mr. Chadwell boasted to the group that he
had made 15 times his investment, turning a belief in
Audible and $25,000 into a $400,000 stash.

Mr. Kingery revealed that he had bought a split-adjusted
133,000 shares of Audible at an average cost of 40 cents
each. He sold half his holdings recently, when the stock
was near a split-adjusted high of $10 a share. His sale
translates into a larger payout than Mr. Chadwell's, based
on only half his holdings.

THE recent popularity of penny stocks reflects in part the
sheer number of technology casualties since the stock
bubble burst. "In the last several years we've seen a
number of legitimate tech companies that have been beaten
down badly but then came back from a near-death
experience," said Jay R. Ritter, a finance professor at the
University of Florida.

A stock price languishing below $1 a share is the most
common reason the Nasdaq boots a company off its primary
market, according to data provided by Professor Angel of
Georgetown. "If a stock is trading for under a buck, then
something has gone dreadfully wrong at that company," said
Professor Angel, who serves on a Nasdaq advisory board that
oversees its bulletin board. "Generally stocks go public at
$10, $15 a share. So if they're trading for under $1 a
share, then they've lost more than 90 percent of their
value."

Just as a high-end retailer doesn't carry cut-rate products
because shoppers may start to doubt the quality of all its
goods, the major markets don't want to sell the equivalent
of what he called "shoddy apparel."

So many Nasdaq stocks were trading for less than $1 just
after Sept. 11, 2001 - one in six, according to Professor
Angel - that Nasdaq felt obliged to impose a moratorium on
delistings. It lasted three months. Yet for many companies,
including Audible, that only meant delaying the inevitable.
"One of the things the Nasdaq does well," Professor Angel
said, "is flush the losers."

Some plainly needed to be flushed, like PlanetRX and
Webvan, two dot-coms that had once had high profiles but
that declared bankruptcy and are no longer traded on any
public exchanges. But hundreds of once-proud members of the
Nasdaq are barely hanging on. The Salon Media Group, for
instance, was trading on Friday at 13 cents a share - a
paltry figure, though not when compared with shares of
DrKoop.com, which were at one one-hundredth of a penny.

Then there are the dot-com comeback stories, including
Audible and others. Shares in the Varsity Group, which
sells textbooks and other education materials online, hit a
low of 16 cents in April 2001 but closed at $6.74 on
Friday. The Knot, an online wedding site, traded at 22
cents a share in July 2002; it is now at $5.00. The Knot
trades on the over-the-counter bulletin board but applied
this month for listing on the Nasdaq SmallCap Market.

And it is companies like these that provide the attraction,
for amateurs as well as for some professional investors.
Jeffrey D. Saut, the chief investment strategist at Raymond
James & Associates, the investment firm based in St.
Petersburg, Fla., is gung-ho on penny stocks. To him, the
ranks of the penny stocks are about the only place to find
real bargains, or what he described as "mispriced pieces of
paper, which is to say stock certificates that are
undervalued."

In just a few months, he said, he has had an 89 percent
return on an investment in a Canadian-based energy stock he
bought at 48 cents a share. He has had a return of 37
percent over roughly that same period on a battery
technology company trading on a Canadian penny stock
exchange.

Yet he sounded like a car commercial that cautions people
against trying the stunts themselves. "The average person
shouldn't be participating in the penny stock arena," Mr.
Saut said. "They don't have the skill set to determine if,
first of all, it's a real company or a fraud. And they
don't have skill set to understand the accounting or to
analyze the assets."

Unscrupulous promoters have exploited investors' ignorance
in the past, using false or misleading statements to
inflate the value of penny stocks, then cashing out before
the companies' true value - or lack of value - become
apparent and the stocks tumble. The process is so common
that the authorities have given it a name: pump-and-dump.

The amateurs who so aggressively invested in Audible,
however, seemed an entirely different breed, starting with
the tone of their discourse on the stock message boards so
popular on the Internet.

"I think it's fair to say the message boards aren't exactly
a model of intelligent interactions," said Donald R. Katz,
the founder and chief executive of Audible. The typical
participant posting messages at a place like Yahoo or
Silicon Investor tends to sound like a sports fan, using
too many exclamation points and having a propensity to
write in all capital letters, as if screaming.

"But here was a group that did their own financial models,"
Mr. Katz said. "They went deep into our financials and
worked up a pretty classic analytic analysis of the
company."

AUDIBLE had a scant 3,000 customers when it went public in
July 1999. Yet Mr. Katz said it wasn't impatience or greed
that prompted him to sell shares in his young company.
Instead, it was a concern about the half-dozen or so
competitors looking to cash in on this same market.

"The deal then was that if you didn't take the money, if
you didn't step up as the I.P.O. of the category, someone
else would have," he said. "Believe it or not, going public
was a defensive thing."

When Mr. Katz started Audible in 1995, there was no iPod.
Nor was there any mass-market digital player that would
serve as a natural platform for the books, magazines and
newspapers - including The New York Times - that Audible
now delivers digitally in digest form.

That meant Audible needed to invent both the hardware and
software required for people to download, store and listen
to the audio books and other content that the company
intended to sell. At the same time, Mr. Katz had to
persuade publishers to take a flier on his fledgling
enterprise. "That proved to be much more difficult than I
or my investors ever anticipated," he said, with an
expression somewhere between a frown and a smile.

Mr. Katz's company arranged for the Mirage suite and a full
bar and hors d'oeuvres to help his loyal investors
celebrate, and he was in an expansive, reflective mood
shortly before the party. A well-regarded author and
financial writer before "trying to prove whatever I'm
trying to prove with Audible," he said that one of his more
vivid memories from the company's early history was a chat
with Jeffrey P. Bezos, the founder and chief executive of
Amazon.com.

"Jeff said he thought about building an entirely new
category, like I was doing, rather than a new business
system for an existing marketplace, like Amazon, but he
said his analysis showed starting a new category would take
10 years," Mr. Katz said. "I thought we'd get there much
sooner, but I hate to say, he was right."

Audible was able to start reporting profits last year, nine
years after it was created. Digital media players are now
ubiquitous, and the company now sells its audio content
through the Apple Computer iTunes store. More recently, it
signed a deal with Sprint, hoping to find a place on
people's mobile phones.

For early investors, though, Mr. Katz's miscalculation
proved painful. The company's stock hit an intraday high of
$25 on its first day of trading but within a year it was at
less than $5 a share, and after 15 months it was below $1.
(The numbers are not adjusted for the subsequent reverse
split.)

"It felt for a while there like we had gone away," Mr. Katz
said, and in a way it did. Wall Street analysts stopped
following the company, and the institutional investors who
had believed in it sold their shares. Audible continued its
practice of having a quarterly conference call to report on
its financial picture and to field questions from the
analysts and institutional investors, though almost no one
bothered to participate.

"I'd be the only one asking questions," said Ray Unger, the
president of Unger Capital Management, an investment
advisory firm in Madison, Wis., with $26 million under
management. "I'd ask, 'Tell me about your churn rate; tell
me about your cash flow.' And then they'd ask, 'Any other
questions?,' and there'd be silence until they said
goodbye."

Mr. Unger, who described his investment in Audible as a
"career win," said the routine repeated itself for around
18 months.

Small-time investors communicated with one another through
a message board on Yahoo, but that Internet portal, as is
its policy, dropped its Audible site after the company was
delisted in February 2003. That prompted William T. Katz -
no relation to the founder - to create his own Audible
site, which served as the catalyst for the group that would
eventually rendezvous in Las Vegas this month.

"People really got riled up when the company was delisted,"
Mr. Katz said. "They felt it was unfair. People wanted to
rally around the company."

Mr. Katz, the investor, once described the hard-core
Audible advocates who sometimes posted as many as 10
messages a day as a "motley crew." He upgraded his
assessment to "very eccentric" after meeting several of
them for the first time the night before the party. He
might have offered himself as Exhibit A. Mr. Katz, 40, has
an M.D. and a Ph.D. in biomedical engineering from the
University of Virginia, but nowadays he devotes his time to
writing science fiction and developing an authors' Web site
called Writertopia. When proposing a meeting here with a
reporter, he suggested a "Star Trek"-theme bar at the
Hilton.

Mr. Katz bought shares of Audible shortly after it went
public, but instead of feeling burned by a stock that fell
so precipitously, he saw a prime buying opportunity. He was
a true believer in the service, heartened that the company
showed revenue growth quarter after quarter, despite its
financial woes. (It burned through $49 million from 2001 to
2003.) Convinced that Audible's stock was priced
"irrationally low," he said, he kept buying. Ultimately, he
stopped after roughly 60,000 shares, most of which cost him
less than $1 each, because he began to worry that he was
risking too much of his portfolio on a highly speculative
stock.

SUCH stories were heard over and over at the Mirage
celebration. At one point during the party, the investors,
standing in a circle, took turns sharing tales that seemed
to differ only in the specifics. Tom Hallam, 60, a retiree
from Hilton Head Island, S.C., told the group that he kept
buying shares as the stock price fell, until he ran out of
discretionary income when the stock was trading at 30
cents.

Though he owned more than 30,000 shares, he held on until
the company hit a split-adjusted $10. Only then did he sell
roughly half his stake. "I never would have had the courage
to hold the stock without the support of you guys," he
said.

http://www.nytimes.com/2005/01/23/business/yourmoney/23penny.html?ex=1107491669&ei=1&en=c7e0...