Mad Money

Mystique of the Single-Digit Stock

Staying Mad, Pt. 2

Stocks under $10 can be attractive. Maybe too attractive. For those of us with less money to invest, we think we can buy more, thus increasing out returns. There’s also the notion that a stock that cheap can’t decline much more, thus decreasing our losses. But these ideas are dead wrong, Cramer said.

After all, stocks don’t drop below $10 for no reason. Most likely, the company’s in some sort of trouble. Remember this before you buy a name you think you’re getting on the cheap. Cramer once overlooked Charter Communications' massive debt because the stock was trading at only $4. He bought a position, and CHTR soon dropped to $2.

To avoid this problem, Cramer recommended applying the “multiply by 10” test.  If Charter were $40 and had all the same problems that it did at $4, would he still have wanted it? Probably not. Use this same type of reasoning before you buy your next under $10 name.

Questions for Cramer?

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