Anatomy of stock market scams

For now, the music appears to have stopped on Bursa Malaysia. Daily trading volume has come down to less than five billion shares compared to the average of 10 billion transacted in the months of July, August and September.

TWO months ago, this column wrote about how retailers were hooked to the stock market and that many would get their fingers burnt when the party ended.

For now, the music appears to have stopped on Bursa Malaysia. Daily trading volume has come down to less than five billion shares compared to the average of 10 billion transacted in the months of July, August and September.

In the first week of August, trading volume went as high as 27 billion, with retailers being the bulk of buyers.

The buying frenzy was on the back of Bursa being a beneficiary of the Covid-19 pandemic due to it having the largest listed producers of nitrile gloves in the world.

Those who bought into glove stocks would have probably cashed out with a hefty profit. A good many who went into other healthcare-related stocks are probably licking their wounds, hoping to recoup their money or at least minimise their losses if there is a rebound.

The buying frenzy extended beyond glove stocks into almost anything that had to do with Covid-19. Initially the play was on companies venturing into production of Covid-19 related products such as masks, personal protective equipment (PPE) and hand sanitisers.

The margins on these products are thin and there are no barriers to entries, meaning the profits are small. But the play on the stock price was huge.

Then came the vaccine theme and the latest is the air travel theme with companies offering a complete solution for those wanting to travel in and outside the country. In the midst of the several themes related to the pandemic, share prices of unknown names went through the roof and came down with a heavy thud.

For investors, there are several lessons to be learnt from the Covid-19 rally.

Firstly, the old truth about buying on rumours and selling on news remains very relevant. If a particular stock price is running on speculation accompanied by heavy trading volume, there probably is not much upside left. It’s a signal that the speculation is well known and many are chasing the stock.

The price will almost certainly come down and can retrace up to 50% when the news comes out. These days, the exchange does not wait for the company to make an announcement. It sends the company a query and, from the replies, one will be able to ascertain if there is truth to the speculation.

Secondly, one should be careful trading stocks whose ownership is through a myriad of cross holdings. A cross holding is when two or more listed companies own significant blocks of shares in another listed company. A myriad of cross holding usually leads to problems.

When one of the companies gets into trouble, the other companies also come under heavy selling pressure.

For instance, Ooi Cheing Sim, the substantial shareholder of ATTA Global Bhd and Heng Huat Resources Bhd, was arrested by police for investigations into drug-related activities in February this year. Ooi was a substantial shareholder in several other companies that he owned directly or through other listed companies. All the stocks came under selling pressure.

There are several groupings of companies on Bursa Malaysia with cross holdings and common shareholders. These companies also tend to have have common directors.

Fintec Global, for instance, owns several listed companies directly and indirectly through listed and unlisted entities. Some directors in Fintec Global also sit on board of other companies such as XOX Bhd, PDZ Holdings Bhd and Anzo Holdings Bhd.

A common pattern is the myriad or cross holdings that link one company to another.

There is a reason why some individuals control listed companies through cross holding structures. It reduces the holding cost. For instance, when Fintec Global buys a stake in another listed company, it forks out the money. But the major shareholders of Fintec Global control the new listed company indirectly.

Thirdly, one must look out for companies raising money through share placements, especially if the proceeds are to be used as working capital or to repay loans. The smaller the amount raised through a placement, the higher the scrutiny it warrants.

It is normal for companies to issue new shares to raise money to fund an acquisition.

The better managed companies have their substantial shareholders taking up some of the new shares as a show of commitment.

However, if the bulk goes towards working capital, there is no end to the company issuing more shares in future. Also nobody really knows what the working capital is used for.

Sometimes, it can also be used to buy shares in other companies or support the share price.

Also, if the bulk is used to repay loans, there is also a possibility of the company taking up more loans again. So, why risk taking up a stake in such companies?

Finally, one must look at the euphoric share price rise of companies with warrants.

Sometimes, the share price rises significantly to the extent that there is a healthy discount to the warrants. Investors get sucked into buying the warrants on the assumption that they can convert to the underlying shares and sell within 10 market days.

However, the run on the underlying share lasts for less than 10 market days i.e. two weeks. Before the holders of the warrants can see through the conversion exercise, the share price of the mother share comes tumbling down.

There are a few examples of such cases. Last year, DWL Resources Bhd, now known as KTG Bhd, saw a euphoric rise of the shares with the entry of new shareholders.

The jump in share price kept up for a few days, causing a huge discount to the warrants.

The warrants were trading at less than 60 sen each while the underlying mother share was more than RM2.

The conversion for the warrants was only 60 sen. But investors who bought the warrants ended up suffering huge losses when the underlying mother shares came crashing down within days.

An active market with healthy trading volume is good.

It attracts retail investors and gives investors a sense of feel good. But one has to watch out for the traps and the pitfalls.

The views expressed here are solely that of the writer’s.

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