Production of Emerald Oil, a publicly traded rice bran oil producer, has ceased since 2017, and has therefore suffered losses every year since then. But his stock has increased 223% in the past year.
The staggering surge propelled the manufacturer into the list of the top 20 winners of the Dhaka Stock Exchange (DSE).
Emerald oil is not the only case. On the contrary, other junk stocks are also on the list, raising the question of the overall efficiency of the market.
As of October 2020, 10 companies on the list were in category B and Z. Of these, seven were in category B and three were in category Z.
When a company does not pay at least 10 percent dividend, it is classified in category B. It is included in category Z, if it does not make a profit or stops production.
“I am happy to see that the market index rises after a long time. But I am not happy to see the abnormal rise of such companies,” said Faruq Ahmed Siddiqi, former chairman of the Bangladesh Securities and Exchange Commission ( BSEC).
“The abnormal rise of these companies proves that our stock market is fueled by rumor, greed and manipulation.”
He says some people trade with each other to drive up prices and spread speculation. Out of greed, general investors invested funds in these stocks.
“Quality investments are scarce in the market, so the index is also unrelated to the economy. Therefore, when profit-taking occurs, people panic.”
Among the 10 worst performing companies, the production of C&A Textiles and Emerald Oil has been closed for several years. Aramit Cement, another Z-category stock, has been in the red since 2017.
Dhaka Dyeing, Maksons Spinning, Salvo Chemical, RD Food, Beacon Pharmaceuticals, Metro Spinning and Mozaffar Hossain & Spinning Mills are classified in Category B for declaring insignificant amount of dividends for years.
“The abnormal surge in prices of these companies indicates that the market is inefficient and fueled by speculation,” said Shahidul Islam, CEO of VIPB Asset Management Company.
“This is not a good sign for a market.”
When poor firms outperform the growth of the index, the fundamental objective of the capital market, which is the allocation of capital, is hampered, Islam said.
The DSEX, the benchmark of the country’s leading stock exchange, rose 51% between October last year and October 12 this year.
Waste inventories collectively increased by 52.08% on average over the same period, according to data from the DSE.
“These companies were mainly based on low paid-up capital, and it is easy to manipulate as their stocks are small. They are therefore targeted by dishonest traders,” said Ahsanur Rahman, CEO of Brac EPL Stock Brokerage.
“If a company doesn’t have an expansion plan, its stock shouldn’t go up. But speculation is fueling its price.”
Attracted by the price movement, some investors have flocked to the stock market over the past year to make a quick buck, Rahman said. “But they shouldn’t invest in such stocks.”
Earlier this year there were rumors that a foreign investor was going to buy Emerald Oil. But in a regulatory case, the local company ruled out this possibility.
A senior official at an investment bank, preferring anonymity, says that undesirable and underperforming businesses have increased mainly as a result of speculation, and company officials are often involved in it.
Referring to the Emerald Oil case, he said the company’s disclosure raised a question.
On July 12 of this year, he said that the board of directors of Emerald Oil had decided to start its full-fledged commercial operation from September 1 with a daily production capacity of 48 tons of bran oil. rice.
But on August 26, he said the company was unable to start the business operation.
With offices closed from July 23 to August 10 due to strict containment, the company was unable to renew or obtain most of the required licenses, according to information posted on the DSE website.
“The BSEC should monitor the activities of companies to reduce opportunities for manipulation. Otherwise, the goodwill of the market will be hampered,” said the investment banker.
Like its predecessors, the current BSEC commission pays more attention to the rise or fall of the index, although this is not its duty, he added.
Thus, investors should be cautious and invest after assessing the potential of companies. “Otherwise, they will lose money,” Siddiqi said.
VIPB CEO Islam added, “If investors invest in good stocks, it will give them better returns in the long run. “
Mohammad Rezaul Karim, spokesperson for BSEC, said people investing in underperforming stocks were not unusual in a bull market.
“But at some point investors come back to stocks with good fundamentals. The same will happen soon,” he said, adding that the commission was trying to educate investors.