Most of the time when you hear the term “penny stocks” you might think of cheap shares of start-up companies. But the fact of the matter is this, the definition of a penny stock is stated simply by the SEC as equities with a share price of less than $5 per share. There’s no designation of exchange or things like that. Despite these being “generally quoted over-the-counter,” you can also have NASDAQ penny stocks, NYSE penny stocks, and penny stocks of foreign issuers.
No matter how you slice it, the penny stock definition is very simple. Why do I say this? People have a hard time coming to terms that their favorite stocks could be penny stocks. There’ve been some negative connotations when it comes to these cheap stocks.
But let’s face it, at the end of the day, people are making money with penny stocks every day. Hedge funds and analysts also place their bets on them in the form of large positions, ratings, and price targets. Don’t forget that there’ve been plenty of penny stocks that became billion-dollar companies as well.
So are penny stocks bad? In my opinion, they’re only as bad as you make them. Some people avoid them entirely almost in a manner of superiority to the company. How I see it: these are just stocks so treat them as such, make money and move forward.
Needless to say, one thing’s for sure, they are riskier than companies like Apple (AAPL Stock Report) or Alphabet (GOOGL Stock Report). That’s due to things like lower liquidity, lower prices equating to higher volatility, and reporting requirements in cases of OTC penny stocks.Penny Stocks: Buy Low Sell High
Most of the time, people buy penny stocks in order to capitalize on quick moves up in price. Now, there are some that have options that go along with them and there are penny stocks that can be shorted. Buy the general population who purchase these small-cap and micro-cap stocks tend to play it in one direction. They try to buy low and sell high. So it’s interesting to see stocks go in the opposite direction after holding such a strong place in the market.
We saw this earlier in the year with one penny stock, Nio, Inc. (NIO Stock Report). We pretty much called it ahead of time even amid scrutiny of the opinion that NIO could become a penny stock. To some investors’ surprise, Nio officially became a penny stock in March of this year and hasn’t looked back (up) since.
Don’t get me wrong, there are plenty of days and weeks where shares end up producing short-term breakouts. But at the end of the day, we’re still talking about the same Nio that was trading above $10 with plenty of liquidity in Q1 of this year. So why mention all this? It’s come to my attention that one of the more popular telecom companies in the market, Sprint Corp. (S Stock Report) has inched close to that upper end of penny stock territory.Is Sprint Corp (S) At Risk Of Becoming A Penny Stock?
For starters, Sprint isn’t a stranger to low prices. The last time it could have fallen under the definition of a penny stock was in April of 2018. This came as the stock slid from highs of $9.65 in January of 2017. But this wasn’t the only time the telecom company played in penny stock territory.
Pull a chart out a little further, and Sprint’s stock was actually a mainstay at these levels from 2008 on. Sure, it climbed in and out of that range. But, all the same, this is no stranger to becoming a penny stock.
To understand the true risks at play, we should understand how Sprint stock got here in the first place. It recovered strong and consistently from Q1 2018 to its highs of this year. But when did things start to slide? It’s no secret that there’ve been talks about Sprint an industry cohort, T-Mobile (TMUS Stock Report) merging.A Case For 5G
But it hasn’t been an easy road. Multiple Democratic states led by California and New York are suing in order to attempt to block the deal.
Even though it received all regulatory, national security, and antitrust approvals required by the US government, there are still staunch opponents. While feet get dragged, the race for 5G continues to rage on in other parts of the world; mainly China. Former FCC Chair Reed Hundt wrote an Op-Ed citing several, must-meet milestones for Sprint and T-Mobile that are far beyond troubles dealing with the proposed merger.
“Our platform builders – the communications companies – need to get quickly to the job of building America’s 5G networks. That’s why I urge rapid closing on T-Mobile’s acquisition of Sprint: it is important to propel our economy and society into the era of distributed connected computing in a hurry.”Issues Persist In The 5G Ecosystem
Though the US may ban Chinese firms from deploying 5G, the rest of the world likely won’t. That could post a huge opportunity and risk for US firms. An opportunity presented in the fact that there’s big money that can be obtained but a risk in the aspect that progress isn’t moving quick enough.
States are hung up on blocking mergers like this instead of moving toward progress as some might argue. “This edge, where 5G and AI meet, is new ground for doubling, tripling, probably quadrupling the size of America’s information industries. Barely perceptible now, this new ecosystem would be wide open for competition and innovation,” said Hundt.
Then again, Sprint likely has more to address than opponents of its proposed merger.Sprint-ing To A Resolution With The FCC
It’s unfortunate but according to several sources, Sprint has “for years failed to accurately measure” the number of low-income Americans it services. This is specific to the federal plan called the “Lifeline Program,” which offers communication services at an affordable price for low-income consumers. It essentially gives discounts for monthly phone service as well as internet access and even VOIP services. These all need to be purchased from a participating provider who, in turn, is granted subsidies for participating. Now, the FCC won’t let Sprint be.
Sprint is one of these participants. According to documents reviewed by The Wall Street Journal, Sprint didn’t accurately report its Lifeline users. It didn’t come up short but, instead came up well-above its reported figures.
The company is facing a potential settlement with the FCC after the regulator said the telecom company improperly collected “tens of millions” of dollars in these federal subsidies. This equated to 885k customers of Lifeline who didn’t even use the service.
Of course, Sprint’s defense was a “coding error” but this wasn’t a lone-wolf instance. The company’s had a history of bad reporting. Mistakes were made in 2013 and 2014 showing the company inaccurately tallying Lifeline customers as part of Sprint’s subscriber-base according to the Journal.Where To Point The Finger Next?
It’s hard to think that such a company would use the same tactics that kids do, but in the grand scheme, you can be the judge. After getting hit in 2013 and 2014, Sprint stated that it agreed it made a mistake and because of it, the company “corrected that mistake and cooperated with regulators.”
But then it happened again. In 2014 the documents show that the Sprint senior counsel wrote at the time, “This was the result of miscommunication that occurred over time and in connection with a series of contemporaneous regulatory changes and IT-related initiatives.”
Then Sprint made changes to its IT platform again after more program changes with Lifeline in 2016. After those system changes were made emails cited by the Wall Street Journal show Sprint’s Assurance Wireless brand recorded incoming calls to voicemail as outgoing calls in a few cases.
But also think about how many spam calls and texts you get every day. These same texts could keep dormant accounts active, which allows Sprint to keep collecting subsidies for the customers, according to the documents reviewed by the WSJ. The Journal even sites that, “In one case, the phone of an Oregon woman who died months earlier was still deemed active.”
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This resulted in lines staying active. Thanks to instances like this, Sprint got hit with losses in the most recent quarter. It planned to reimburse the government for wrongly collected subsidies.What’s Up Now For Sprint?
This is just a brief overview of a look through a small window into Sprint itself. There’ve been multiple “mistakes” credited to “technical errors” and “miscommunication” over the years. This case is something that the company needs to resolve with the FCC directly. On the other hand, the 4th largest wireless carrier by subscribers is in the middle of what could be a monumental merger with T-Mobile.
In this regard, there is strong support and strong opposition to that happening. There are now 10 states that have joined the Justice Department’s resolution relating to the Sprint-T-Mobile deal. Nevada was also a recent drop off from the merger lawsuits. So you be the judge.
No matter what, 5G is likely coming and the US needs to step up to the plate. This merger could present opportunities for the company itself but in the meantime, it’s also in the middle of a messy situation with the FCC all while its share price hovers around levels nearing the upper limit of penny stock range.