Speculators pour Sh300m into NSE’s penny stocks

Capital Markets

Speculators pour Sh300m into NSE’s penny stocks


Speculators have poured more than Sh300 million into the Nairobi Securities Exchange’s cheapest stocks in the last five years. FILE PHOTO | SHUTTERSTOCK

Speculators have poured more than Sh300 million into the Nairobi Securities Exchange’s cheapest stocks in the last five years, betting on the chance of marginal gains at a bargain in a time of general price declines at the market.

Eveready East Africa, Home Afrika, Uchumi, East African Cables, TransCentury and Flame Tree Group have all seen their prices dip below the Sh1 level at some point in the past one year, effectively making them penny stocks by Kenyan standards.

Over a period of five years, these six counters have collectively recorded a turnover of Sh300 million, with Sh37 million worth of trades coming in the last 12 months.

Although their traded turnover and volumes are just a small fraction of the activity worth billions seen on large blue chips, the trades show that there are investors who are buying into small-cap counters in hope of a quick gain.

Read: Mumias sugar brand back on shelves after a decade

The bulk of the market’s trades are concentrated on the top five counters by market capitalisation, led by Safaricom whose valuation of Sh939.5 billion accounts for 48 percent of the NSE’s total investor wealth.

Blue chips, therefore, tend to do better in terms of price discovery and are also more consistent at paying dividends to their shareholders due to stable fundamentals and superior profitability.

On the other hand, small stocks at the NSE suffer from a low volume of issued shares and thin trading that limit the ability of an investor to book large gains on their trades.

Some of the low-priced stocks have also been negatively affected by governance or financial performance hiccups that have in some cases persisted longer than the current bear run, indicating a weak investment case for the stocks.

Investors would ordinarily eye a falling market as an opportunity to buy under-valued stocks, positioning for future capital gains.

Business Daily analysis of the share price performance of these six small-cap stocks shows that they have recorded returns of between -4.5 percent and -28 percent over the last 12 months.

Mumias Sugar and Deacons, whose shares remain suspended, last traded while in the cents territory, which reflected their negative equity position and corporate governance concerns.

The financially troubled firms were placed under receivership on September 20, 2019, and November 19, 2018, respectively due to default on loans amounting to billions.

Also read: Uchumi demands Sh3bn from KDF in asset auction deal

The complete erosion of shareholder wealth would require capital injection for the firms to return to being going concerns.

In addition to the six actively traded stocks that have ventured below the Sh1 level, another 15 are trading below Sh5 per share, reflecting the negative effect of the bear run at the bourse.

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