Circuit City now has six months to come into compliance with the NYSE. To do so, the company’s average stock price must exceed $1 for a 30 consecutive trading days before April. With Circuit City’s stock currently trading at around 26 cents, they unfortunately have a lot of ground to make up. So what happens to companies like Circuit City when they face such a predicament? Well they have a few options…

Reverse Splits and Share Buybacks

One route they can go is to do a reverse split of their stock. As you probably know, when normal stock splits take place, the shareholders get more shares at a lower price. For example, if you own one share of a company trading at $100, and they do a 2-1 split, you now own two shares worth $50 each.

Well, if a company performs a reverse split, it’s just the opposite. So, if you own 10 shares of Circuit City that are each worth 26 cents today, and they do a 1-10 reverse split, you now own 1 share worth $2.60. The problem with this strategy is that investors generally figure out what’s going on and the price will tend to sag back down after the reverse split takes place.

Another way to push a stock price back over the $1 is a share buyback. In a buyback, a company buys shares of its own stock back from investors. The result is fewer shares available on the stock market, which means that the remaining shares are worth more. For a cash-strapped company like Circuit City, however, forking out the money to buy back shares is a pretty tall order.

Where Do I Find Delisted Companies?

If the above methods don’t work, and if Circuit City’s stock price doesn’t recover own it’s own before April, they will be delisted and will most likely move to the Pink Sheets or the Over-the-Counter Bulletin Board (OTCBB). Washington Mutual serves as a recent example of delisting. On September 29, after filing bankruptcy, its share price dropped from $1.69 to three cents and it was booted from the NYSE and moved to the OTC under the symbol WAMUQ.

Finding companies that have been delisted, or that are about to be delisted, can be a tricky process. While the NASDAQ and NYSE don’t maintain public lists of companies who’ve received notice, the Internet makes it relatively easy to scour the media for delisting notifications.

But you might be wondering why you’d want to look for delisted companies anyway…

Delisting isn’t a death sentence in and of itself. Often in a down market, healthy small-cap companies can be delisted due to a depression of share prices or a decrease in their trading volume. After 9/11, for example, the NASDAQ announced a three-month moratorium on listing requirements since hundreds of companies had fallen below the $1 threshold as a result of the market crash.

There’s a pretty bad stigma with delisting, and few companies want to join the club of stocks that got booted from the big leagues. As a result, many firms fight hard to get their stocks back in line with the exchange’s requirements. It’s definitely not unheard of for a stock to do well after delisting is threatened.

What’s a Reverse Jumper?

In the penny stock world, one of the most lucrative plays to get in on is a “jumper.” As Penny Stock Fortunes editor Greg Guenthner puts it, a jumper is “an unknown micro-cap stock that’s destined for a transition to a major exchange after a period of steady — or explosive — growth in an overlooked segment of the market.”

But did you know that harder to find “reverse jumpers” can be just as profitable. Reverse jumpers play on the edge of getting delisted only to get their acts together and rake in serious profits for their investors.

Now, you don’t want to invest blindly in stocks being threatened with delisting — you’ll end up with a portfolio full of Circuit Citys or WaMus if you do that…

But if you can spot a penny stock with solid fundamentals being threatened with delisting, especially in this market, you might find out just how powerful a reverse jumper can be.

Regards,
Jonas Elmerraji & John Schuler

November 6, 2008

P.S.: The potential profits on these stocks when they jump from the Pink Sheets and OTCBB to the major exchanges in staggering.

The Down and Dirty on Delisting was originally featured in the Penny Sleuth.