The Motley Fool: Penny stocks are no way to build wealth

Bad pennies

Q: Since penny stocks are so inexpensive, I can buy thousands of them, which can make me richer faster, no? – HE, Wilkes-Barre, Pa.

A: Sorry, no. Penny stocks might seem like bargains, but they wont necessarily grow faster than other stocks. A $1 stock and a $60 one can both go up (or down!) by the same percentage in one day. With a 5 percent increase, the $1 stock will rise in value by 5 cents, to $1.05. For the $60 stock, its a $3 jump, to $63. If the $60 stock is tied to a healthier company with competitive advantages, actual revenue and profits, and a lower valuation (perhaps as suggested by its price-to-earnings ratio), its likely a much better bargain than the $1 stock.

Penny stocks (which trade for $5 or less per share) can be more likely to plummet than skyrocket. Theyre risky, and often hyped and manipulated. Penny-stock investors are typically looking to get rich quick, but thats not how reliable wealth-building works.

Focus on the long run – plenty of big, successful blue-chip companies have made shareholders happy over many years. Penny stocks have made many unhappy. Its fun to own 5,000 shares of something, but not when they crash.

Foolish Trivia

Name that company

A pioneering global importer of decorative home furnishings and gifts, I was born in California in 1962. My early offerings included beads, incense, beanbag chairs and groovy furniture, and over my decades in business Ive sold all kinds of things, such as wicker armchairs, hand-painted dinnerware, distinct clothing, scented candles, decorative accessories, and even life-sized suits of armor. Based in Fort Worth, Texas, since 1966, I now boast more than 1,000 locations in 49 states and Canada – and I have a presence in Sears de Mexico boutiques, as well. I employ about 21,000 people globally. Who am I?

Last weeks trivia answer: Twitter.

The Take

Kicking Hertzs tires

If you have a parking spot to fill in your long-term portfolio, consider Hertz Global Holdings (NYSE: HTZ). Accounting problems have pressured the stock and may potentially delay the spinoff of its equipment business, but theres a lot to like in Hertz.

Hertz will be restating its past three years of financial reports. Thats not great news, but it could be worse. First off, the restatement is focusing on expenses, not aggressive revenue recognition policies or anything that suggests dramatic wrongdoing. Revenue growth, which is critical, will not change.

With the car-rental industry consolidating in recent years, having fewer competitors can prop up prices and profit margins for Hertz. (Hertz has participated in the consolidation, buying Dollar Thrifty last year for $2.3 billion.) Of course, business landscapes change over time. It remains to be seen whether new ride-sharing businesses such as Uber and Lyft turn into threats for car-rental companies such as Hertz.

Hertz plans to complete the spinoff of its equipment-rental business sometime next year. The move will give the company net proceeds of $2.5 billion, which will be used to pay down debt and reward shareholders via share buybacks (which reduce share count and thereby boost earnings per share). With a forward P/E ratio near 12, Hertz is worth a closer look. (The Motley Fool owns shares of Hertz.)

Universal Uclick

  • Love
  • Save
    Add a blog to Bloglovin’
    Enter the full blog address (e.g. https://www.fashionsquad.com)
    We're working on your request. This will take just a minute...