Denver's 'penny' stocks: heads you win, tails I lose
No matter how many modern skyscrapers and fancy three-piece suits Denver sports, the city pulls much of its energy from the same sort of rough-edged frontier spirit that the mining magnates brought in when they came down from the Rockies and built their mansions on Capitol Hill.Skip to next paragraph
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Few things symbolize the city's freewheeling and headlong growth as much as the local over-the-counter new-issues market, better known as the penny stock market. Literally hundreds of new public companies come to Denver to raise capital by issuing stock in the penny market.
It is a hotbed of speculation that, for a while, raised millions for budding ventures - particularly energy companies.
During 1979 and 1980, the penny stocks - so called because most opened for less than $1 a share - were a modern-day gold rush. Investors would climb Mt. Everest to get in on a new issue before it went to the public, because stocks slated to open at 10 cents a share frequently soared quickly to 20 cents a share.
By 1981, some 40 brokerage houses catered exclusively to the Denver penny market, both in selling the stocks and underwriting the issues.
The entrance requirements are far less stringent than those of the two major US stock exchanges, while salaries have reportedly been much higher on average. Incomes of $50,000 and $75,000 were common. Penny brokers became notorious for their high-pressure sales techniques, drawing the attention of both the Securities and Exchange Commision and the Denver district attorney's office.
In 1981, though, the high-rolling penny market stumbled and has since fallen to its knees.
From the first week in January 1981 to the first week of this year, a stock composite index assembled by the Denver Stock Exchange, a publication that closely follows the market, dropped about 30 percent. New issues used to drop into the market and take off as fast as the underwriters could issue them. But last year as many as 50 languished unissued at any one time.
Irving Hale, vice-president and research director at First Financial Securities, among Denver's largest investment banking firms, recorded an average decline of 7 percent in the price of new issues during 1981, although 1980 had seen the average soar by 112 percent. In 1980, a new issue could triple in price as soon as it hit the street. Last year, most were selling at a discount, and the trend has continued into 1982.
Allen R. Alden, chairman of First Financial, is unconcerned, however. ''This market goes through cycles like any other market. It's currently on the down side of the cycle, but it will swing up again.''
A number of things brought the penny stock market down to earth, says Terry Freeman, editor of the Denver Stock Exchange. Money market funds and other instruments offered relatively safe avenues for good returns, ''So there was a strong competition for that investment money.''
The oil glut and the considerable publicity given to it rubbed some of the luster off energy stocks, the mainstay of the penny market. ''There was a general impression of an oversupply of oil, and the prices of oil were coming down,'' Mr. Freeman explains, ''so some of the urgency to rush in to buy oil stocks was declining.''
As new investors entered the market at its peak, distorting prices, buyers who had been in for some time and watched paper profits take off started cashing in. Perhaps the key element, though, was the basic law of supply and demand: while investors were losing interest, new issues were pouring into the market at record rates, resulting in a glut of stocks and a drought of money.
There are some indications, though, that the penny market is getting set for a new up-cycle. In recent weeks a few stocks have started to show some spunk. The shares of one company, Energy Oil, traded for about 75 cents before Christmas but one recent day closed at $1.50 a share.
''There is a lot of interest coming back in looking for the deals that are under 35 cents, that are underpriced and have traded higher but because of the slow market fell back,'' one broker says. Still, many old hands are just sitting back and waiting to see if the market will turn around.