Penny Stock Case StudiesUnderstanding Penny Stocks by Peter Leeds

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The Rise and Fall of Enron

rise and fall of enronEnron, once a high-flying blue-chip trading around $90 a share, and listed by Fortune 500 as the seventh largest company in the United States, fell to levels of closer to $0.20 in only a matter of months. Billions of dollars in stock market value disappeared in only a fraction of the time it took to make them.

At the company's height, Enron had 21,000 employees and was the largest natural gas merchant in the country.

As Enron 'became' a penny stock, I personally received numerous questions and e-mails from subscribers of my newsletter about the viability of the penny stock as an investment. Traders thought they were getting a deal by gobbling up shares of a company for pennies, when those same shares were worth nearly $100 only a year earlier.

penny stock enron

Whether you bought in at 25 cents or $90, those shares are now worthless.

This reinforces a lesson that many bargain hunters choose to ignore again and again: It may have already lost 99% of its value, but it CAN go lower, and it very often does.

Too frequently traders say to themselves, "Really, how much lower could the stock possibly go?" Using that as the extent of their research, they invest feeling secure, and just as if they had bought at $50 or $20, they lose 100% of the money they put in.

enron penny stock

Enron's former Chairman, Kenneth Lay,
testifies after Enron's collapse.

penny stocks enronI was pleased when Kristen Hays from the Associated Press contacted me for my comments on Enron. I was able to use the interview as a forum to provide my position on the entire Enron situation.

Here are some of the comments published by the Associated Press. This interview was picked up by several dozen media sources, and was published on several continents:

  • Peter Leeds, president of and author of "Stocks That Will Make You Money," said penny stocks should be discovered before anyone else recognizes a good deal - not bought on the cheap after falling from lofty heights.
  • Enron descended into bankruptcy in December amid allegations of accounting abuses that included hidden debt and inflated profits. Shares that approached $90 each in the fall of 2000 plummeted to less than a dollar, leaving workers and retirees with depleted 401(k)s that had been loaded with Enron stock.
  • Leeds said penny stocks are particularly volatile, and 95 percent of them are poor investments. His company tries to find the 5 percent with realistic upside potential, using criteria that include a proven management team, growing revenues and earnings, a low or nonexistent debt load, patented technologies or innovations, and market dominance.
  • "I would say that Enron falls well short in all of these categories," Leeds said. "From our perspective this rules out the stock many times over."
  • He said Enron meets the criteria for high trading volume and brand recognition. But the volume decrease since January makes it more difficult to profit from speculative trading. And the name "has a negative connotation and so is an additional strike against the stock," Leeds said.
  • Even Enron officials have said they will leave the name behind as it reorganizes to focus on its natural gas pipelines and power operations and tries to emerge from bankruptcy.

So, what happened with Enron anyway? To make a long story short, they cooked their books. Vastly understating billions in debt and liabilities, while using accounting obscurities to polish the look of their financials, they set themselves up for a tremendous collapse.

There are Two Morals to this Case Study

  • The first is that stocks CAN go lower, regardless of how much they have already dropped.
  • The second is that even the professional analysts and money-mangers that followed the stock closely can be fooled by crafty bookkeeping.