Herd instinct on penny stocks will burn retailers
The Colombo Stock Exchange (CSE) retailers have found new life going into the holiday season, but this recent surge could be catching a number of traders off guard, given the elevated short-interest levels in penny stocks seen on retailers, analysts say.
Analysts called it the ‘herd instinct’ and noted that retailers are comfortable with trading in shares below Rs. 10, termed as penny stocks.
Over the past two months, 90 per cent of the shares traded on the CSE were by local retailers. There was hardly any foreign investments. “The local retail buyers are buying shares – mostly penny stocks – with the intention of selling on the same day. These investors are short term, short gain day trading investors,” an analyst pointed out. He said this is evident from the shares traded over the past two months such as Browns Investments Ltd (BIL), Expolanka plc, Milk Foods plc, Melsta plc, LOLC and most banking counters. BIL and LOLC dominated CSE’s trading on Wednesday.
Another analyst agreed noting that the buying patterns of these shares reflect the type of investors as short-term non-strategic. “The lack of strategic investors in the market is a concern.”
He also noted that some stocks are highly speculative in nature and people gamble on these strips with huge bids. These companies have small capitalisation in the market and their penny stocks can pose a high risk for investors who invest to make quick money in short periods. He added that in a low interest regime, with majority retailers in a short trading cycle will witness share prices rising sharply without fundamentals. The low interest rates are pushing retailers into the CSE with their maturing fixed deposits not fetching good interest rates in the current environment. A third analyst agreed noting that today’s market is an anomaly as a result of the short trading. “The concern is that most retailers are aware of this and will be holding the baby at the end of it, getting severely burnt.”