Saturday 5 September 2009

Euphoria over small-cap stocks rising as risk appetite returns

Potentially lucrative small stocks outperform blue chips amid upturn

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Guanyu said...

Euphoria over small-cap stocks rising as risk appetite returns

Potentially lucrative small stocks outperform blue chips amid upturn

By Yang Huiwen
04 September 2009

Small is beautiful - and profitable. That seems to be the increasingly popular mantra of stock traders here.

Blue chips may have led the recovery after the stock market’s trough in mid-March but they quickly showed market leadership in April amid a rapid infatuation with smaller and often risky stocks.

Since then, small-cap stocks, many of them largely speculative plays, have been outperforming blue chips dramatically - and the gap is steadily widening.

Since the start of the year, the FTSE ST Small Cap Index is up 79.42 per cent, nearly double the 41.9 per cent rise in the blue-chip Straits Times Index.

The surge in speculative activity suggests that investors’ appetite for risk is being whetted again, in tandem with an improvement in the economy both at home and abroad.

Market observers say that as the global economy continues its recovery, investors are tending to become a little euphoric and to put their money in potentially lucrative small stocks.

They are particularly keen on affordable stocks going for under a dollar - even better if they have a strong growth story.

In buying these stocks, they stand the chance of doubling their investment in a short timeframe, rather than settling for typically small percentage gains if they opt for blue chips.

In the 2007 bull run, a speculative bubble was created when prices of small companies like Jade and Oculus soared at least eight times; but they crashed by as much as 90 per cent when the bubble burst.

Similar speculative fervour is back just months after the financial crisis seemed to have made caution a byword.

Stocks that have made stunning returns include Sarin Technologies, which was up a whopping 90.9 per cent last week alone. EMS Energy, a relatively unknown counter, surged 115 per cent yesterday to 14 cents on a volume of 100.4 million, compared to just 555,000 shares in its last trading session on Monday.

Even in the United States, risky stocks such as AIG have quadrupled in value from US$13 to US$50 last month.

In Hong Kong, the secondary S&P/HKEx GEM Index is up 59 per cent compared to the 37 per cent gain in the benchmark Hang Seng Index.

Guanyu said...

Judging by the current run-up, fundamentals are being thrown out of the window as investors punt on the prospect of higher returns, observers say.

‘Investors pile into these shares though some are way above valuations,’ said Westcomb Securities research head Goh Mou Lih.

‘The fever is only created when the market’s on a run and when things are improving. With the economic recovery, it is less likely we’ll see companies running into problems or bankruptcy.’

The price surge can sometimes be exa-cerbated by small volumes. With less free float of shares, a little bit of interest can push a stock price up substantially.

Sabio Global director Alan Lok said: ‘Of the gains in small-cap stocks, about 70 per cent of them are purely speculative. Those who have missed out on the blue-chip bull run see this as a second opportunity for them to make money, especially when blue chips are not going to have any big increments.’

In the long run fundamentals will be the key, said Mr. Lok.

‘Some have risen to ridiculous levels. The run-up can’t last that long.’

Westcomb’s Mr. Goh said small caps will slide when the STI falters.

Said DMG & Partners Securities co-head of research Terence Wong: ‘Speculative activity has come back in line with the overall improvement in economic sentiment.’

He noted that there are significantly more speculative stocks and unknown names in the list of most heavily traded stocks compared to three months ago, when stocks hogging the list were ‘more known names’.

‘That is worrying. Companies with no fundamentals are entering high volumes,’ he said.

‘There have been many such cycles. Eventually, the law of gravity will still set in - and penny stocks will fall a lot harder than blue chips.’

‘Once there’s a fear element coming in, there will be a flight to quality and people will gear towards blue chips.’