The lure of the bull - by Debraj

For persons keen on indulging in the multifarious aspects of the ever-enthralling world of the stock markets, the last month or so has never let any torpid moment. The markets have as if single-mindedly zoomed northwards taking every bear in its stride. In this unprecedented display of bull-wrath, investors get all the more prone to be taken off their feet and take a downright plunge into whichever scrip seems to be reaching dizzy heights. But watch out! Amidst the flurry of a zooming stock market lurks the risk of untracked depravity in certain stocks.
The greatest risk comes from a certain coterie of penny stocks. If things aren’t quite apprehensible yet, figure this. A bearing manufacturing company in Mumbai named XYZ Ltd. (name changed to conceal its identity – ref. from Business Today) no longer makes bearings but only trades in those catering mainly to Northern India. Net profits for the past 3 years have steadily headed downwards from Rs. 18 lakhs to 1 lakh in 2005! Now hold your breath. In keeping pace with this downward spiral in earnings, its P/E ratio breached the 1000 mark recently! Well, to make matters easier for eyes yet unused to sift through the myriad financial ratios in the business pages of the daily morning newspaper, let me put it this way. P/E implies in its physical connotation the amount of price an investor is willing to pay up to see through one rupee increase in earnings of the company. It is in effect a barometer to gauge investor confidence in the scrip. Having said this, we are but left with gawking looks to explain how XYZ Ltd. Can command such extravagant P/E!!
Infact, this is just one among many such penny stocks that flaunt such 4-figure valuations with such mightless ease that will put any frontline stock to shame! To make matters worse, some FIIs are also found to take interest in these scrips for whatsoever reasons. The quarry in this entire episode seems to be the ordinary investor who having reposed faith in such scrips take the brunt of the pitfalls directly on their chin!
A checklist for investors dealing with such high-risk stocks will be apt at this juncture.
1. Watch out for the history of its earnings. A steady decline in earnings coupled with a concomitant rise in valuation might spell warning.
2. Beware of any erratic trading pattern in the scrip. A sudden flurry of activities followed by an extended lull is not a healthy sign.
3. Excessive promoter holdings will naturally tend to give more leeway to promoters to manipulate the prices.
4. Watch out for the activities performed by the company. No wonder, you may find it transformed by the sweet whim of fate from a manufacturer to a petty trader of its own stocks!!
In a bull run as the one witnessed recently, caution is definitely the watchword to swear by. The slightest error in judgement might unleash the fierceful juggernaut of the stock markets to an investor. After all, it might have been some such hard luck that would have prompted the investment mavens to promulgate the pithy saying:
"The markets can remain irrational longer than you can remain solvent."