Brand-Name Stocks Under $10: Buyer Beware

These well-known names in the bargain bin may look appealing, but experts advise avoiding them until their earnings picture is clear

by Karyn McCormack

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Welcome to the 2008 third quarter—and a big summer clearance sale on Wall Street. Amid a broad stock market slump, many brand-name companies that we know so well, such as Ford (F) and Motorola (MOT), have been tossed in the $10-and-under stocks bin.

But wait—there's more. Other big names that are trading below $10 are Sprint Nextel (S), Washington Mutual (WM), Del Monte Foods (DLM), and many airlines including Northwest Airlines (NWA), UAL (UAUA), Delta (DAL), and JetBlue (JBLU). (For a list of more names under $10 see the accompanying slide show.)

And one more illustrious name joined the single-digit list: General Motors (GM), which touched a 53-year low of 9.98 on July 2.

The Stigma of Low Stock Prices

What's the big deal about low stock prices? First, there's a certain stigma attached to a stock with a sub-$10 price—it's a sign that a company faces big problems. Besides the blow to a company's pride, there's a more nettlesome issue: Some institutional investors won't touch stocks that trade for less than $10, making it difficult to recover from those depths.

The common problem for most of these stocks: dismal or no earnings growth. "The market price of a stock is ultimately driven by earnings over the long term—that's where you need to start," says Jim Huguet, president of money manager Great Companies in Tampa. "The reason they're where they are is because of lack of earnings growth or earnings have declined, in some cases due to the business or management."

A weak economy, or problems in a particular industry or inside a company may be too hard to overcome, leaving a stock wallowing in the single digits for a long time. For example, the low-flying airlines face high fixed costs for planes and labor, plus the crush of soaring fuel prices, Huguet says. In this kind of commodity business, very few companies have an advantage and are able to boost sales and earnings.

Investing in One Customer Strategy

Some companies, such as Ford and Motorola, can invest too heavily in one customer strategy, leaving them unable to respond when customer demand and needs change, says Graham Hales, chief communications officer at brand consultant Interbrand. Ford focused on sport-utility vehicles and trucks during a time of fuel price uncertainty, environmental concerns, and a slew of cheaper, foreign alternatives, he says. Motorola bet heavily on the RAZR wireless handset for five years.

"Both Motorola and Ford have failed to bring new products to their largest markets, North America and Europe, while competitors have successfully [eaten] away at their leadership position through new products and better brand management," Hales says.

In turn, Ford and Motorola were two of the biggest decliners in Interbrand's most recent Best Global Brands ranking -- losing 19% and 9% from their brand values, respectively. This shows that brand values are linked to stock prices, Hales says. Now both companies will have to figure out ways to reinvent themselves again to stay alive, says Michael Farr, president and chief investment officer of Farr, Miller & Washington in Washington, D.C.

One big brand that's starting to show glimmers of hope is Sprint Nextel (S). Last week its shares jumped 13% on talk of a turnaround, despite heavy selling in the markets. Sprint, which hit a low of 5.48 back in March, rose another 6%, to 9.50, on June 30.