Investors of junk stocks found value among the ruins

Stocks of Khan Brothers PP Woven Bag Industries soared 10-fold over the past year even though the company has been drowning in losses while an auditor found that its assets are missing.

Within just eight months, the company's stocks skyrocketed from Tk 9.9 to Tk 97.5 on the trading board of the Dhaka Stock Exchange (DSE), marking the highest rise among all shares in 2023.

However, Khan Brothers is not the only poor-performing company on the top five gainers' list at the premier bourse of the country.

For example, stocks of Trust Islami Life Insurance, a newly listed insurance company, rose almost five-fold to Tk 51, posting the second-highest rise in 2023.

Following close is RN Spinning Mills, a Z-category stock, which saw its share value soar three-fold. Likewise, the poor-performing B-category stocks of Khulna Printing and Package Ltd climbed three-fold.

Fellow B-category companies FAR Chemical Industries and Emerald Oil saw their stocks rise three-fold.

Md Sajedul Islam, managing director of Shyamol Equity Management Ltd, said all well-performing stocks remained stagnant while poor-performing ones rose in what was a common scenario year-round.

"So, people are rushing to buy these stocks. If we recommend not to buy poor-performing stocks, then they tease us."

Islam said investors pour their funds into the stock market to make money. Therefore, they pay no heed to the advice of brokers and instead seek poor-performing stocks in the hope of securing significant returns.

"But once the floor price mechanism is withdrawn, all investors of poor stocks will lose their money," added Islam, a former vice-president of the DSE Brokers' Association.

In July 2022, the Bangladesh Securities and Exchange Commission (BSEC) set the floor prices for every stock to halt their freefall amid global economic uncertainties brought on by the coronavirus pandemic.

In December last year, the regulator lifted the measure for 169 companies as part of measures to withdraw the move in phases. However, the floor price was reintroduced for all stocks in March this year since uncertainty in the economy persisted.

Khan Brothers PP Woven Bag Industries incurred losses in the first quarter of 2023-24 when its earnings per share stood at Tk 0.01 in the negative.

Meanwhile, the company's auditor gave a qualified opinion and emphasis on the matter in its audit report for the fiscal year that ended on June 30.

An auditor gives a qualified opinion when it finds that the company under audit did not represent its true value in the financial report.

During its physical verification, the auditor found the amount of deficiency of raw materials and finished goods would be Tk 40 crore.

"So, when the stock of such a company can rise at that rate, it shows that the market has a serious problem and its regulator is not working at all," said a merchant banker preferring anonymity.

He also said the stock market has become the best place for gambling as the floor price mechanism has made their activities easier.

As good stocks are now stagnant due to the floor price, all traders are now aiming to buy the stocks about which there is speculation. But these stocks are vibrant only for a period. So, investor participation in gambling has become easier.

"As a result, many investors may have even forgotten the names of good stocks like Square Pharmaceuticals and Grameenphone in the absence of their trading," he added.

The merchant banker also said real investors are considering the market as a "dead market" that is now the cause of job cuts for many stakeholders such as asset management companies, merchant banks and brokerage houses.

"We have been bound to cut expenditures in order to survive as most trading is concentrated on the same stocks."

The rise of poor-performing stocks while blue-chip ones retreat or remain static for months on end is not a good sign for the market, said an asset manager.

"It is denting investor confidence and it will take a huge amount of time to alleviate the blow."

More importantly, the stock market is now tagged with manipulation.

"There is almost no turnover without the trading of manipulation-centric stocks," he said.

Trust Islami Life Insurance is not a junk stock considering its growth in profit. However, the company's auditor provided an emphasis on the matter in its report for 2022 as it breached the Securities Act by not forming a workers' profit participation fund.

RN Spinning Mills remained in the loss in the July-September period of 2023-24 when its earnings per share were Tk 0.02 in the negative.

The company's auditor also gave a qualified opinion and emphasis on the matter in its report for the preceding fiscal year as it has been showing recoverable insurance funds of Tk 132 crore for the last four years even though the fund is not returning.

Production of RN Spinning has also remained shut since a fire incident in 2019, the auditor added.

Another top gainer, Khulna Printing and Packaging, also saw losses in its latest quarter. The EPS stood at Tk 0.06 in negative in October-December of FY23.