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Unending lull on the market

PICTURE this: Medtech, Willdale, Pelhams, Steelnet and Ariston, in that order. What quickly comes to mind?

Struggling businesses beset by innumerable problems, most of which are not of their own making but a result of the structural weaknesses in the economy. They are also penny stocks that seldom attract the attention of an average investor especially institutions such as pension funds and insurance companies. And so goes the list of negatives.
In fact, quite the opposite; the line-up represents the top five performing stocks for the week to August 6, 2010.  The top performer, Medtech, amassed a 50% price rise to US$0,10c while the least of the five counters, Ariston, went up 20%. There are no plausible reasons for the quintet’s good showing. Their operations remain depressed and may take a while to improve unless they get capital injections soon to boost production.
The strength in the prices of these stocks is just another episode in the seesaw pattern that has been playing out from the start of this year. Counters with smaller market capitalisation have largely been the majority in both the upswings and the downswings. Take the same period to the 6th, as an example; the five worst shakers were Zimplow, Caps, Trust, Gulliver and Zeco with losses of 10,8% for the first and 33,3% for the last. The other three recorded declines in-between that range. Again, there are no compelling stories to explain that performance. To say the share prices tumbled because of the companies’ poorly performing operations will be inequitable because one week is too short a period to gauge the impact of weak fundamentals. Also, there are many other companies with equally feeble business results but occupy better positions on the table. 
The swings in the prices of small caps indicate the incidence of speculative trading by retail investors. Thin volumes are being traded across the market although the penny stocks seem to be the worst effected. With the overriding pessimistic sentiment in the market, prices of small capitalised counters change rapidly even for smaller values of trades. Consequently, the lowly priced shares have been dominating both the top and bottom five performance tables for most of 2010 so far.
For the seven months to  July 31, the best performing shares were Interfin ( formerly CFX) at the top, followed by Willdale, Hunyani, Edgars and Pelhams in that order. The latter’s market value grew by 40% and it shared the same spot with Fidelity and Phoenix. Interfin gained 50% over the comparable period. As noted with the recent weekly rankings, penny stocks also anchored the table.  Gulliver was the best of the worst five after losing 46% in the year to July 31, followed by Radar, Pioneer and Redstar while Zeco was the worst of the worst as it lost 90% of its value to US0,03c.      
The loss in value gets scarier if one considers the reduction in market capitalisation. Zeco was valued at US$4,6m on December 31, 2009 but that has since been whittled down to US$139 000 only. For a company which came onto the market with assets then valued at US$300 million, the loss in value must be heart rending to the company’s shareholders. In 2007, the  Independent carried a story, ahead of the company’s listing, that the then sole shareowner had rejected a US$60 million offer for Zeco from an unnamed American company saying the price represented a gross undervaluation of the company.
Another badly affected company, Redstar, saw its market value slumping to US$687 200 as at July 31 from US$3,4million when the year started. The fast moving consumer goods operator is one of the very few listed companies with negative equity. Its financial statements to March 31, 2010 showed that the company was insolvent with liabilities exceeding assets by US$5,4 million. A business restructuring exercise is in progress with management hoping that the reorganisation together with an injection of new capital will turnaround the business. However, considering the cutthroat competition in the FMCG sector the battle to survive for Redstar and other operators who have been slow to come to the party looks all but lost. African Sun was worth US$84 million on  December 31 2009 but that has since reduced to US$25 million in July this year. This is a far cry from the US$1 billion market cap which management projected for 2012.
Trading on heavily capitalised counters has been low because of the lack of interest by offshore hedge funds. These funds were responsible for the bulk of share purchases in 2009 while their involvement this year has been minimal because of uncertainties brought about by the policy on indigenisation and political ambiguity. Unless there is a positive shift in policy, foreign investors will remain on the
sidelines which will affect blue chip counters. In the meantime the seesaw on the penny stocks will continue.

Ranga Makwata

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