Unknown stocks have been targeted in the US amid a reduction in analyst research, while an obscure Chinese stock spike chimes with the planned increase of regulation
by Rosalie Starling
The year-to-date 30% gain in the stocks of industrial products manufacturer Handy & Harman – exceeding the rise of Google’s parent company Alphabet – has highlighted how cuts to Wall Street analyst jobs have led to the increased targeting of ‘unknown’ stocks,
Reuters’ David Randall writes.
The firm, worth an estimated $412m, was relatively unknown because no sell-side research analysts had published earnings estimations.
Paul Sonkin, a portfolio manager at Gabelli Funds, which owns Handy & Harman shares, is quoted by Randall as saying that more of his contemporaries are looking at small-cap firms with no sell-side coverage, hoping that the decline in research will give them the opportunity to buy ‘unknown’ stocks before other investors discover them.
An analysis by
Reuters supports Sonkin’s view, revealing that companies in this small-cap benchmark have risen 30% in the past three years due to the lack of scrutiny emanating from Wall Street research companies.
“What we're looking for is some kind of edge, and if there are fewer analysts covering a stock there's a greater chance that it will be mispriced,” Sonkin explains.
Top performing fund managers at Fidelity, Janus Henderson, Hodges Capital and Baron all agree with this prognosis.
Reuters article
Unusual share behaviour in China A similar incident recently occurred in China. On 4 August 2017, the stock of Fangda Carbon New Material, a relatively unknown manufacturer of graphite electrodes, was the eleventh most traded common stock worldwide, reports
Bloomberg. Turnover for that day surpassed that of JPMorgan Chase, despite the firm’s $8.4bn market capitalisation – far below the equivalent $331bn value of the global financial services firm.
Bloomberg reports that Chinese authorities are watching the issue closely. Fangda announced on 24 July 2017 that preliminary first-half net income was up 26-fold, but its shares had been rising prior to this news. In fact, they have risen 200% since late June.
People “familiar with the matter” say, according to
Bloomberg’s report, that the Shanghai Stock Exchange will act with disciplinary action if this share behaviour continues. Such action could see select investors’ accounts restricted or, in more extreme circumstances, them being labelled as an unqualified investor.
Meanwhile, Yin Ming, vice president of investment firm Baptized Capital, who is quoted by
Bloomberg, believes that Fangda may have possibly fallen prey to speculative investors because its product charges electric car batteries, which are currently receiving a boost via incoming subsidiaries from the Chinese government. Such trading frenzies are common in China, Ming adds.
Bloomberg article
Chinese regulators stepping in Fangda isn’t the only company that the Shanghai Stock Exchange is monitoring. In fact, according to
CNBC’s Sophia Yan, any corporate actions that could lead to the market being jeopardised will face scrutiny; especially firms who engage in complex deals to transfer ownership for reasons that are not completely clear.
Yan cites a recent deal involving Dalian Wanda, a private conglomerate, and Sunac, a real estate developer that is publicly listed, as an example. The unusual structure of the deal caused concern in industry and government, especially after the 2015 crash eliminated trillions from the market.
30%
The amount that small-cap firms with no sell-side coverage have risen in the US over the past three years
More regulation is coming due to massive capital outflows that can affect the volatility of the yuan, says Yan. With Chinese companies increasingly expanding abroad, industry and government regulators want to clampdown on money leaving offshore and, therefore, control debt-related risks. Such deals, however, are another cause for regulatory concern because they can be obscured, as those investing are private firms with publicly listed subsidiaries.
Many of the positive factors that are supporting the Chinese economy, such as exports, industrial investment and property investment, may have peaked, according to Vincent Chan, an analyst at Credit Suisse, who is cited by Yan. Chan also believes the earnings cycle upgrade is coming to an end.
And, in a further bid to punish those who manipulate the market, the country’s securities regulator also recently banned over 1,000 funds and individuals from investing for up to a year.
Whether it be regulatory intervention in China, or maximising a market that is short of analysts in the US, it will be interesting to see how these developments play out in the global marketplace.
CNBC article
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