Orphan stocks are companies that have fallen off the Wall Street radar. Low share prices or other reasons result in a lack of coverage by the Wall Street analysts who typically provide buy, sell or hold type ratings on stocks. For the individual investor, orphan stocks can be sources of significant investment income.
Orphan stocks are defined a couple of different ways. One measure is stock price, with any stock under $5 per share categorized as an orphan. Many institutional investment companies, such as pension plans and endowments, have policies that prohibit owning stock worth less than $5. Another definition of orphans is stocks that are not covered by any Wall Street analysts. These analysts are investment professionals who dig deeply into the prospects of different companies and provide ratings that investors use to judge investment potential.
The popular stock of a big company can attract many analysts. As examples, Google and Bank of America each have about 30 analysts providing opinions. Just about every piece of public knowledge about these big companies spreads quickly. For an orphan stock without analyst coverage, there is no pipeline to the public supplying news about the company. No news means no investor interest, which means little buying interest, resulting in a low share price, even if the company is successful and profitable.
Hundreds of corporate stocks are not followed on Wall Street. An investor looking for undervalued investment opportunities can do her own research on orphan stocks, comparing and contrasting with larger companies. All companies are required to file quarterly financial reports with the Securities and Exchange Commission. These reports can help an investor determine how a company is doing financially and formulate her own buy, hold or sell ratings.
The best outcome for an investor in orphan stocks is for one or more of them to be discovered or rediscovered on Wall Street. A buy rating by an analyst who decides to report on an unfollowed stock can produce an immediate increase in the share price. Rising share prices tend to attract more investors and possibly a few more analysts. Once a stock like this escapes from the orphanage, the value investor can take his profits and go look for new orphan investment candidates.
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