Analysts: No need to fear 'penny' speculation

Penny run-up brings much-needed liquidity back into market; it's a case of 'buyer beware'

The ongoing penny stock rally is creating a buzz in what has been an otherwise-quiet local market, but the activity has also led to questions of whether investors are buying into companies with seedy governance and financials.

Among the stocks under the spotlight is Qingmei Group Holdings. The China-based shoe-sole maker has been one of the key beneficiaries of the penny run, gaining 325 per cent on July 21 to 3.4 cents, a level it has maintained.

When queried by the Singapore Exchange (SGX) over the abnormal trading activity, Qingmei noted last Wednesday that it has ceased production and has also been without a financial controller since February.

The SGX said in a statement to The Straits Times: "As announced on June 30, SGX rejected Qingmei's first application for an extension of time to announce its financial statements for its financial third quarter. This reflects SGX's concern about the absence of a financial controller and the importance SGX places on the company finding a replacement promptly."

It added: "A company's share price performance is due to many factors, including the company's underlying fundamentals and business prospects; corporate governance is not the sole determinant."

While it is inaccurate to think that penny plays are rife with governance issues, market watchers agreed that investing in pennies is inherently risky.

"Generally speaking, there tends to be a bigger occurrence of governance and financial issues among the penny stocks, as small caps are likely subjected to a less stringent set of listing rules. But the thing about penny stocks is: caveat emptor. Let the buyer beware," CMC Markets analyst Nicholas Teo said.

The onus is on investors to know what they are getting into. "The question of whether a company is properly governed is always relevant, but at the same time a functional market will always correct itself, just like what's happening to Noble Group. So there's no need to be anxious about the underlying quality of this penny run, especially since it's still in its infancy."

Veteran investor Mano Sabnani agreed: "This run-up is not as fierce as the last build-up that led to the penny crash in 2013. The market regulators need not overreact and kill this rally. Speculation is a key part of the market - for those that want to do so, let them."

The penny run this time has centred mostly on a group of S-chips. The Catalist Index has gained only 4.6 per cent since hitting a 12-month low on July 8. The Small Cap Index, which also hit a 12-month low on July 8, has gained 1.7 per cent since.

Nonetheless, traders are experiencing much excitement. One of them is remisier Alvin Yong, who noted that the penny run-up has brought some much-needed liquidity back into the local market.

But investors should know what they are getting into, he stressed. "Playing pennies is typically about speculation... It's generally not fit for long-term investment objectives." If one's objective is to ride the market, good governance and financials may not matter, he noted.

"The question to ask is how long the rally will last and whether you can generate return in a certain time frame, which in pennies' case should be quite short," he said.

For those who prefer stable but still affordable picks outside the blue-chip segment, mid-cap stocks offer good opportunity as some are still trading at below their fair value, Mr Yong added.

The key to investing in penny plays is to know when to exit, DBS head of Singapore equities research Janice Chua said. "There is no hard and fast rule that says how long stocks should be held. The most important thing before buying is to know the reason why you are buying, such as anticipation of earnings growth or a specific event. Stick to your investment as long as that reason remains valid," she said.

"The worst mistake that many investors make is the refusal to exit even though the reason behind their purchase is no longer valid."

A version of this article appeared in the print edition of The Straits Times on July 27, 2015, with the headline 'Analysts: No need to fear 'penny' speculation'. Print Edition | Subscribe