Investors still chasing junk stocks

Junk stocks have frequently featured on the top gainers' list for the past few weeks, bringing into question investors' preference for such shares despite their substandard performance.

A company's stocks are termed as junk when its commercial production is shut or it is failing to provide dividends to shareholders or to hold an annual general meeting.

While hanging around Brac EPL Stock Brokerage in the capital's Motijheel on Tuesday, this reporter asked an investor the reasons for him buying a junk stock.

"Gamblers are going to play with the company," he said on condition of anonymity.

"On the other hand, the market regulators' recent steps to enable a rebound of their performance also instigated me," the investor added. The Bangladesh Securities and Exchange Commission (BSEC) has taken the initiative to restructure companies whose performance is below par.

Till date, the BSEC has replaced boards of directors of six listed junk companies -- Emerald Oil, C&A Textiles, Ring Shine Textiles, United Airways, Familytex (BD) and Alhaj Textile Mills.

Market analysts believe that investors are misinterpreting the regulators' steps, which could blow up their portfolios.

It cannot be said for certain whether the new boards will be successful in bringing the companies back on track.

Take the case of United Airways. Its newly formed board already informed the BSEC that it would need a huge amount of fund to make a comeback.

A similar situation prevails for all other junk stocks and so bouncing back will be no easy task.

However, the BSEC's steps are definitely praiseworthy as they will try till all mean are exhausted to make companies perform well again.

Despite such drawbacks, investors continue to make a rush for these companies.

This reflected on Bangladesh Industrial Finance Company (BIFC), Imam Button Industries, Zahintex Industries, Tung Hai Knitting and Dyeing, Tallu Spinning Mills, Aramit Cement and some other junk stocks prevailing in the gainers' list on a couple of days last week.

The Aramit rose 38 per cent, BIFC 14 per cent, Imam 15 per cent, Zahintex 13 per cent, Tung 19 per cent and Tallu 10 per cent in the past two weeks.

The investors need to be cautious about their investment and should think about the damage to their portfolios if the companies cannot make a rebound.

They should invest in good companies so that their dividend returns can offset losses even if stock prices of the companies fall.

In fact, investors should invest taking into consideration the performance of companies and hold stocks for long periods of time in order to benefit as investment in junk stocks is too risky.

"When you invest into a well-performing stock, you will worry less, so why should a rational investor invest into junk," said Shahidul Islam, CEO of VIPB Asset Management Company.

"We always prefer top-performing companies to make investments," he said, adding that uncertainty remained over whether any junk stock would be able to make a comeback, so seeing investor taking risks was confounding.

The DSEX, the Dhaka Stock Exchange's (DSE) benchmark index, fell 17 points last week.

The daily average turnover, an important indicator of the market, rose 20 per cent to Tk 866 crore.