Uninformed low-dollar speculation is one of the easiest ways to get wiped out, according to Cramer. Just because a stock trades for a couple bucks doesn’t mean it has to go up. In fact, many low-dollar stocks only go down further.
That’s why Cramer introduced two mortgage-related stocks, IndyMac Bancorp and Standard Pacific , to the Sell Block on Thursday.
It’s obvious that these stocks are horrible. Just look at the charts. Both companies were trading above $30 less than two years ago, and now they’re around $2. But that’s what makes them look so enticing to many investors. You may think: “how much could I really lose on a $2 stock?” The answer is everything.
You need not look much further than Thornburg Mortgage as proof that low dollar speculation can ruin you. That company was at $3.40 in March after being a $9 stock days earlier. People who bought it there lost nearly 50% overnight. The stock is now worth less than one dollar.
And these companies make Thornburg look good, as far as Cramer in concerned.
IndyMac’s bad loans are skyrocketing, the company keeps diluting shareholders as shares outstanding continue to build up. And it isn’t even saying it can be profitable this year as it remains heavily exposed to the worst areas of the California market, which make up nearly 50% of its holdings.
Standand Pacific is just as bad. New orders and sales are down big and if it weren’t for its writedowns, the company’s gross margins would have been negative last quarter. It’s also got tons of exposure to California, the Southwest and the Southeast – or everywhere you don’t want to be, Cramer said.
Both these mortgage offenders have low share prices, but that doesn’t mean they’re cheap. Cramer wouldn’t touch either and urged Homegamers to steer clear of speculating on low-dollar stocks.
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