Sunday, May 10, 1998

Why some penny stocks are not worth a penny

By RICK STINE A Dow Jones News Analysis

NEW YORK (Dow Jones News) -- Sometimes, stocks that trade for just pennies are trading for pennies too much.

Such is the case with a handful of companies going through bankruptcy proceedings in large part because crippling debt loads are strangling their businesses.

No, this isn't about scanning through piles of corporate reports, popping company figures into a complicated computer program and waiting to see whether some machine thinks you should buy or sell.

This is about listening to what companies tell you about the value of their equity securities. Simply listen to what the companies are saying.

Caldor Corp. is a good place to start. The company filed for Chapter 11 bankruptcy protection in September 1995. The debtors draft of a reorganization plan has been circulated and, according to a recent filing with the Securities and Exchange Commission, it says: "At this time, it is not expected that such a plan would provide recovery by equity security holders." That means current shareholders get nothing.

Caldor's stock trades at about 65 cents a share.

Bradlees Inc., another retailer, is hoping to emerge from Chapter 11 in August. It also has a reoganization plan that first takes care of its banks, creditors and bondholders. Some of those guys will even receive shares in the new and improved Bradlees. Current shareholders? "Existing Bradlees stock will be cancelled," the company said in a recent press release.

Bradlees stock trades about 25 cents a share.

Alliance Entertainment Corp. is working its way through the bankruptcy-court process. The wholesaler of prerecorded music wants to refocus to Internet business opportunities. Maybe the Internet hype is why someone would dabble with this stock. Maybe they shouldn't. In a recent press release the company said its reorganization plan involves issuing new shares to creditors "and that under the plan of reorganization, current stock in the company will be cancelled."

Alliance Entertainment trades for about 18 cents a share.

L.A. Gear has come up with a plan to emerge from Chapter 11. Is this starting to sound familiar? The footwear company has a plan of reorganization that takes care of current bondholders and preferred stock holders. Existing shareholders? "All of the currently issued and outstanding shares of common stock of L.A. Gear will be eliminated withbout consideration," the company said in a press release in January.

L.A. Gear's common stock trades at 19 cents a share.

Bruno's Inc. is also struggling with a heavy debt load and is looking to reorganize under the Chapter 11 bankruptcy code. In a recent quarterly filing with the Securities and Exchange Commission, Bruno's said a number of reorganization options exist, including one called a "cram-down" that would leave current equity holders with nothing. It adds: "Other potential plans of reorganization could also result in holders of the company's common stock receiving no value for their interests." It's true that a formal offer isn't on the table, but it seems clear current shareholders have a lot to worry about.

Bruno's stock trades around $1.40 a share.

Some investors I've spoken with in recent weeks about these small stocks and others theorize that the roaring bull market in equities and easy access investors now have to the market via online information and trading has resulted in buyers of these stocks thinking they've found the next undervalued security. After all, investors recognize the names. They just don't know the troubles surrounding these companies.

Others who know about the problems these companies have tell me they are buyers because they hope another company will come along and scoop them up, turning the pennies invested into silver dollars.

Well, for those who buy that approach, I offer this company:

Pan American Airways is hobbling through bankruptcy proceeedings, but believes it has found a way out. A company called Guilford Transportation has offered to buy Pan Am assets. Much of that cash will go to pay down Pan Am debts. Current shareholders? "Pan Am's existing equity will not be represented in the proposed plan of reorganization," Pan Am said in a recent press release. A company spokesman confirms that current equity holders get nothing under the proposed deal.

Pan Am's stock now trades on the "pink sheets." No stock changed hands Monday, but it was being bid for 25 cents a share and was offered for 37.5 cents.

Buyer beware.

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EDITOR'S NOTE: Rick Stine is deputy managing editor of Dow Jones News Service.