Select share prices zoom despite weak numbers

As the market regulator SEBI and the stock exchanges go the extra mile to caution investors against falling prey to unrealistic expectations from the market and not to invest in shares without adequate research, there is no dearth of such stocks.

An analysis of a rash of companies that have come out with stock split announcements in the past two months shows that while they command a huge value in the market and some are traded vigorously, their fundamentals do not support the price they command.

Investors, while selecting stocks for long-term investment, look at key parameters, such as net income/profit, equity base, EPS, PE ratio, dividend payout record and promoter shareholding. But a look at some of these stocks, such as Maa Jagadambe Tradelinks, Thacker & Co, Cressanda Solutions and Mishka Finance shows that none of these parameters appear to have been applied in any meaningful manner by the investors.

High valuation

The equity stake of the promoters border on zero or is meagre; they have little or no turnover or profit to boast of, and have not declared any dividend for long. Yet, these stocks command valuations that lend them an aura that blue-chips would covet.

More than 20 companies have opted for stock splits in the past few months. The aim seems to be to make the stocks affordable to the ordinary investor. Prominent companies, such as Godrej Properties, Asian Paints and Federal Bank have resorted to this strategy in recent times to make the stocks more affordable after a steep run up in their prices. While these stocks have corporate performance to back up their share prices, many stocks that are fundamentally weak are also riding the stock split wave.

Clearly, there is danger of unwary investors being caught in a trap if they are not choosy. More importantly, how trading in them has escaped the radar of the regulators/stock exchanges is another issue that merits attention.

A mail sent to the BSE regarding this issue remains unanswered.

(This article was published on January 10, 2014)
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