TWO months in the past, this column wrote about how retailers had been hooked to the stock market and that many would get their fingers burnt when the celebration ended.
For now, the music seems to have stopped on Bursa Malaysia. Day by day buying and selling quantity has come all the way down to lower than 5 billion shares in comparison with the common of 10 billion transacted within the months of July, August and September.
Within the first week of August, buying and selling quantity went as excessive as 27 billion, with retailers being the majority of consumers.
The shopping for frenzy was on the again of Bursa being a beneficiary of the Covid-19 pandemic on account of it having the most important listed producers of nitrile gloves on the earth.
Those that purchased into glove stocks would have in all probability cashed out with a hefty revenue. A superb many who went into different healthcare-related stocks are in all probability licking their wounds, hoping to recoup their cash or at the very least minimise their losses if there’s a rebound.
The shopping for frenzy prolonged past glove stocks into nearly something that needed to do with Covid-19. Initially the play was on firms venturing into manufacturing of Covid-19 associated merchandise comparable to masks, private protecting tools (PPE) and hand sanitisers.
The margins on these merchandise are skinny and there are not any boundaries to entries, which means the earnings are small. However the play on the stock price was enormous.
Then got here the vaccine theme and the most recent is the air journey theme with firms providing an entire resolution for these desirous to journey in and outdoors the nation. Within the midst of the a number of themes associated to the pandemic, share costs of unknown names went by the roof and got here down with a heavy thud.
For buyers, there are a number of classes to be learnt from the Covid-19 rally.
Firstly, the previous reality about shopping for on rumours and promoting on information stays very related. If a selected stock price is operating on hypothesis accompanied by heavy buying and selling quantity, there in all probability shouldn’t be a lot upside left. It’s a sign that the hypothesis is well-known and plenty of are chasing the stock.
The price will nearly actually come down and may retrace as much as 50% when the information comes out. Lately, the exchange doesn’t look ahead to the corporate to make an announcement. It sends the corporate a question and, from the replies, one will be capable of verify if there may be reality to the hypothesis.
Secondly, one ought to be cautious buying and selling stocks whose possession is thru a myriad of cross holdings. A cross holding is when two or extra listed firms personal important blocks of shares in one other listed firm. A myriad of cross holding often results in issues.
When one of many firms will get into bother, the opposite firms additionally come underneath heavy promoting stress.
As an illustration, Ooi Cheing Sim, the substantial shareholder of ATTA World Bhd and Heng Huat Assets Bhd, was arrested by police for investigations into drug-related actions in February this 12 months. Ooi was a considerable shareholder in a number of different firms that he owned instantly or by different listed firms. All of the stocks got here underneath promoting stress.
There are a number of groupings of firms on Bursa Malaysia with cross holdings and customary shareholders. These firms additionally are inclined to have have frequent administrators.
Fintec World, for example, owns a number of listed firms instantly and not directly by listed and unlisted entities. Some administrators in Fintec World additionally sit on board of different firms comparable to XOX Bhd, PDZ Holdings Bhd and Anzo Holdings Bhd.
A standard sample is the myriad or cross holdings that hyperlink one firm to a different.
There’s a motive why some people management listed firms by cross holding buildings. It reduces the holding value. As an illustration, when Fintec World buys a stake in one other listed firm, it forks out the cash. However the main shareholders of Fintec World management the brand new listed firm not directly.
Thirdly, one should look out for firms elevating cash by share placements, particularly if the proceeds are for use as working capital or to repay loans. The smaller the quantity raised by a placement, the upper the scrutiny it warrants.
It’s regular for firms to problem new shares to lift cash to fund an acquisition.
The higher managed firms have their substantial shareholders taking on a few of the new shares as a present of dedication.
Nonetheless, if the majority goes in direction of working capital, there isn’t a finish to the corporate issuing extra shares in future. Additionally no person actually is aware of what the working capital is used for.
Typically, it will also be used to purchase shares in different firms or assist the share price.
Additionally, if the majority is used to repay loans, there may be additionally a chance of the corporate taking on extra loans once more. So, why danger taking on a stake in such firms?
Lastly, one should take a look at the euphoric share price rise of firms with warrants.
Typically, the share price rises considerably to the extent that there’s a wholesome low cost to the warrants. Traders get sucked into shopping for the warrants on the belief that they’ll convert to the underlying shares and promote inside 10 market days.
Nonetheless, the run on the underlying share lasts for lower than 10 market days i.e. two weeks. Earlier than the holders of the warrants can see by the conversion train, the share price of the mom share comes tumbling down.
There are just a few examples of such circumstances. Final 12 months, DWL Assets Bhd, now often called KTG Bhd, noticed a euphoric rise of the shares with the entry of latest shareholders.
The soar in share price saved up for just a few days, inflicting an enormous low cost to the warrants.
The warrants had been buying and selling at lower than 60 sen every whereas the underlying mom share was greater than RM2.
The conversion for the warrants was solely 60 sen. However buyers who purchased the warrants ended up struggling enormous losses when the underlying mom shares got here crashing down inside days.
An lively market with wholesome buying and selling quantity is sweet.
It attracts retail buyers and offers buyers a way of really feel good. However one has to be careful for the traps and the pitfalls.
The views expressed listed below are solely that of the author’s.