EVERY INVESTOR KNOWS

or should know that a low-priced stock isn't necessarily a bargain. The reality is that a company's share price tells you absolutely nothing about its valuation or market capitalization. That can be a little hard to remember these days, though, with so many well-known companies sporting stock prices that would seem to be screaming "buy me." The problem is, that isn't what they're really saying.

Call it the revenge of the stock split. It was one thing to gleefully create lots more shares when your stock price was rising during the bull market of the 1990s, and quite another to be stuck with all those additional shares now that the price has plunged. The result: Some big-name former highfliers now sport the sort of low-single-digit stock prices normally found among the dregs of the over-the-counter market. And the signals sent by those prices have become distorted and confusing. With few exceptions, it's only the stock prices that are low; the valuations and market caps are anything but.

Consider Nortel Networks. Despite a penny-stock-grade price of $3.75 (down 71% over the past year), the company still sports a $12 billion market capitalization. Sure, the shares themselves are cheap, but there's a hell of a lot of them out there. Thanks to three stock splits over the last decade, the company has over three billion shares outstanding. It isn't a trivial number. If you purchased one share per second nonstop, you could buy the entire company outright...in approximately 95 years.

Is Nortel a fundamental bargain? Not exactly. With no earnings, no dividend and a valuation at over two times book value, it isn't exactly a stock that would set Graham's or Dodd's heart a-flutter.

Contrast Nortel with tiny New England Realty Associates, a REIT whose stock price is up 100% over the past 52 weeks alone. At $36 a share, the stock might seem more expensive than Nortel's, but the company is actually less than 1/100th of Nortel's size in terms of market cap. And even given the stock's incredible run-up, it remains a comparative steal on almost every conceivable front. New England Realty trades at less than book value and sports a healthy 6% dividend.

Cisco Systems offers another telling example. At $16 a share, the stock might feel cheap compared with Warren Buffet's Berkshire Hathaway, whose Class A shares change hands for an eye-popping $71,000 each. But both companies sport market caps of $100 billion. The reason Berkshire's shares are so high is that Buffett has never split the stock. With only 1.5 million shares outstanding, owning just one share of Berkshire makes you, well...almost one in a million.

Cisco, on the other hand, has split its stock seven times in the last 10 years. So if you've still got a few hundred shares in your portfolio, then take heart, because you aren't alone: There are more than seven billion shares of Cisco outstanding. From a liquidity perspective, that isn't just supply it's suffocation.

I'm not a pessimist, but a realist. And as with most elements of trading, hoping for the best won't do as much as preparing for the worst. A few weeks ago, we calculated how long it might take for many former highfliers to get back to even, given historical returns. And even with the pundits and politicos saying the economy's on the mend, it's important to realize that the market and the economy are two different animals altogether. A recovery in the economy won't mean a double-digit price for Lucent Technologiesor a return to 5,000 on the Nasdaq Composite anytime soon.

Even low-priced stocks can go lower, and stay there for years. During the radio craze of the 1920s, the stock of Radio Corp. of America increased from $5 to more than $500. But after the bubble burst, the stock fell over 98%. It took three decades before RCA returned to its previous highs.

Think that's just the stuff of a black-and-white, pre-talkie era? IBM provided a similar example just a few years back. From August 1987 to August of 1993, Big Blue fell from its split-adjusted high of $42 a share to $10 nearly a 20-year low.

Plenty of today's best-known companies, in fact, still trade at a fraction of their former highs. Archer-Daniels-Midland, for example, trades where it did back in the early 1990s. Apple Computer, despite a 25-year history of incredible innovation, still trades where it did in the 1980s, right about the time the Macintosh II was released. Xerox, a company so ubiquitous its namesake technology defined an entire industry, still trades where it did back in 1985...and 1975 for that matter. Same story for Eastman Kodak, whose stock also changes hands at mid-1970s levels.

The point is that although it's tempting to think that a well-known, low-priced stock can't go any lower, many do, many have and many will. So how low could many of the nation's favorite and most widely owned stocks go? One way to answer that question is to see what the herd favorites would look like if they dropped to 20-year lows, the way IBM did.

The numbers will shock you. If General Electric, which has recently come under fire from Pimco's Bill Gross, dropped to a 20-year low, it would sell for $1.30 a share. (It now trades at around $37.) Probable? Maybe not. But possible? Most definitely.

Merck, which at around $55 has already dropped almost 43% from its all-time high, traded at a split-adjusted $2.12 in the spring of 1982.

Even Microsoft, which wasn't yet publicly traded in 1982, could potentially go much lower than most might think. Although the stock splits might have clouded your memory, the truth is that this was a $4 stock just 10 years ago.

Even the most conservative financial planners or online calculators assume large-cap stocks will return 8% to 12% over the proverbial long haul. I prefer to set my expectations low and be pleasantly surprised. With valuations still high and investors waiting in the wings to sell literally billions of shares at the first opportunity, I still maintain the best odds will come by avoiding the large-cap crowd favorites that still dominate most people's portfolios. The name of the game is making money, and if the herd's running off a cliff, then don't be among the majority who'll follow them down.

Jonathan Hoenig is portfolio manager at Capitalistpig, a Chicago-based hedge fund. At the time of writing, Hoenig's fund held positions in many of the securities mentioned.