KARACHI: The significant feature of trading at the Pakistani equity markets in about the past month was the rally in low-priced stocks. Elsewhere referred to as “penny stocks” or “micro cap stocks,” many market gurus cautioned that pinning hopes on penny stocks could leave investor penniless!
Over the past month, the KSE-100 index remained flat after going up and down in a limited range of 9600 and 9900 points, though for four times it slipped while only a step away from the 10,000 level, the last episode witnessed this Friday.
The uncertainty at the market had much to do with the strained relationships between the government and the judiciary.
“However, what caught the market attention in the last month’s trading was rising investors’ interest in low-priced stocks, especially those below the par value of Rs10,” says Mohammad Sohail, Chief Executive at Topline Securities. Some selected stocks were observed to have posted exceptionally high gains and that too with big volumes. But it would be naive to believe that a ‘low priced stock’ was all the same as a ‘high value stock’. In case an investor was unable to resist the temptation to pick a penny stock, he ought to do extensive research and first understand what he was getting into.
But what was the lure in low priced stocks? Many punters and small investors in particular went by the belief that there was more room for appreciation and so a greater opportunity to multiply wealth. But in the heat of the moment, investors tend to forget that if the price of the small cap stock could rise sky high, it could as easily disappear altogether, leaving the shareholder holding the dirty end of the stick.
The CEO at Topline says that the rally in low-priced shares was sparked by the hefty 400 per cent return dolled out by Lotte Pakistan last year. The price of the share shot up from Rs1.59 at the beginning of 2009 to Rs8.0 by the end of the year.
Investors and punters now believe that instead of putting money in large caps that had the propensity to come under selling pressure by foreigners, it appeared prudent to identify a stock that could replicate the performance of Lotte and was not majority-owned by foreign funds.
The brokerage believes that investing on the Lotte experience was fraught with danger. “Because Lotte Pakistan was a different story altogether where record petro-chemical margins in 2009 coupled with relatively stable Pakistani Rupee and de-leveraging, helped the company to perform well.”
But Lotte is not the only reason that investors jostle for penny stocks. Small-cap companies also sit as a potential target for takeovers. Many small firms carrying mountain of debt on their balance sheet (like those belonging to Dewan Group) or because of operational inefficiencies (see the small cement companies) could be considered to be potential takeover targets.
Investors reckon that either a consortium of banks could enter into a hostile takeover bid for a defaulting firm or a big player might buyout a smaller company that was unable to swim in the sea of financial crisis.
Analyst suggests that in such a case investors ought to consider whether there was to be a benefit likely to accrue to the company from the takeover. A leap in the dark could land the stock buyer in trouble.
In a month’s period the best performing penny stocks were led by the cement laggard-- Lafarge Pakistan. Among the 11 small-cap stocks, it stood out as a top performer in terms of its base low price and high volumes. The scrip was followed by Dewan Salman, giving 89pc and Dewan Cement 52pc returns. Interestingly nine of the 11 small cap stocks that ruled the roost have paid investors nil dividends in the last two years.
