Bargain Bin Bonanza

In what seems like a scene straight out of a financial thriller, hundreds of stocks have tumbled below the golden $1 mark this year, clinging to their Nasdaq listings like party guests who refuse to leave even after the music’s stopped. As of last Friday, a whopping 557 stocks were trading under a buck a share, skyrocketing from a mere handful in early 2021. It’s like a reverse gold rush, where everyone’s striking… well, not gold.

Now, a chunk of these penny-pinchers, 464 to be exact, are strutting their stuff on the Nasdaq Stock Market. You know, the place that usually demands a minimum share price of $1? Seems like that rule’s being treated more like a polite suggestion these days. Investor-protection advocates are raising their eyebrows, suggesting these sub-dollar daredevils belong over in the penny stock playground, not rubbing shoulders with the big kids like Apple and Microsoft.

But here’s the twist: these companies are playing a game of financial limbo, bending over backward to keep their prestigious Nasdaq slots. Nasdaq, playing the role of the lenient bouncer, says, “Hey, our rules are SEC-approved!” giving these companies over a year to get their act together before showing them the door.

Meanwhile, Rick Fleming, a former SEC advocate, is wagging his finger, saying exchanges should be gatekeepers, not open-door party hosts. The scene’s got more drama than a daytime soap opera, with investors pouring into high-yield bond funds, and funds in interest-sensitive sectors like a teen to a TikTok trend.

Adding to the frenzy, many of today’s sub-$1 stocks are the offspring of the 2020 and 2021 IPO and SPAC boom. Remember SPACs? Those were the days, until a regulatory crackdown turned the SPAC craze into a SPAC fizzle. Now, Nasdaq’s showing a guest list of 583 “noncompliant” companies, with reasons ranging from penny stock prices to not having enough shareholders to throw a decent party.

Take AEye, for example, a self-driving car sensor tech maker. They’re on the naughty list because their shares have been lounging below $1 for nearly a year, closing at a measly 15 cents last Friday. That’s a 98% nosedive since their Nasdaq debut through a SPAC merger. Their plan? A reverse stock split – the financial equivalent of a comb-over – to get back in Nasdaq’s good graces.

Reverse stock splits are all the rage now, with 255 so far in 2023, compared to just 159 last year. It’s like a last-ditch makeover for companies trying to look a dollar’s worth. But investors often see these makeovers as a red flag, so companies wait until their backs are against the wall.

Nasdaq’s rule says if you dip below $1 for 30 days, you get a warning and 180 days to shape up. Fail that, and you get another 180 days if you promise to try harder. And if you’re still in the doghouse, you can appeal and delay the inevitable by paying a $20,000 fee for a hearing. It’s like a financial version of musical chairs, where the music never stops, and the chairs are made of IOUs.

Then there’s Inpixon, a location software maker for factories and warehouses, which sparked a trading frenzy this summer after announcing a merger. Despite being relatively obscure, their shares went on a rollercoaster ride from below $1 since January to a trading frenzy on July 25, with a whopping 267 million shares changing hands.

Nasdaq’s been demanding a $1 share price since the 90s, but they’ve hit pause on the rule during market crashes like in 2001, 2008, and 2020. The NYSE plays by similar rules but sees far fewer sub-$1 stocks because Nasdaq is where the small fry tend to swim.

With this surge in penny stocks, concerns are mounting about market integrity. Finance professor S. Ghon Rhee warns that these sub-$1 stocks are like financial tightrope walkers, teetering on the edge of catastrophic losses. Investors could see their dreams, and dollars, vanish into thin air.

So, as Nasdaq becomes a haven for stocks that cost less than a soda, the big question looms: Is this the new normal, or just a bizarre financial fad? Stay tuned, as the penny stock soap opera continues on Wall Street.