Sri Lanka’s Colombo stock exchange has shown remarkable activity for several weeks – smashing previous record highs along the way. Some of the gains made by the more actively traded stocks have little relationship to the company’s performance apart from positive sentiment.
For investors it should be a case of ‘Buyer be aware’: as an example, one particular stock had a nett asset value in the region of Rs 220 back in September 2020. The stock has more than doubled in value by January 2021. The company has reported a loss from its core income streams mitigated by the one-off sale of an asset overseas.
Closer examination of the company’s reported accounts discloses the loss within the Group of over LKR 420 Million to six months ending September 2020. The accounts also disclose that a sale of a foreign asset has netted the Corporate a sum approximately of LKR 17 billion. The stock perhaps trading on that information and sentiment has soared to above LKR 500 per share. To further understand the potential of the Group would be to examine the amount paid in corporate taxes to the government by the Group. This would then necessarily highlight the profitability of the Group. Additionally key to analysing the future growth and profitability in terms of the share price would be to consider how broad-based the ownership remains.
In the case of the Group above the public float of the corporates’ shares amounts to just under 7% with almost 93% of the shares closely held by the founders and beneficial owners.
By contrast companies or groups where the share ownership is broad-based, are unlikely to have over 55% of shares held by dominant shareholders and directors of the Group.
Experts opine that in the event that a company’s shares are broad-based there is less likelihood of price manipulation and price volatility in the market.
One of the reasons the Colombo bourse is showing remarkable fortunes is that interest rates are currently very low. The investment climate is also stifled by and large due to CV-19. Deposit rates are down and savers who depend on interest income are affected to a large degree.
The stock market remains the one place to generate additional income even if it is to supplement lost or reduced interest income.
The volatility of a rising stock exchange provides gains to the informed investor. However of critical import is that the investor is well informed and is constantly aware of the market movements – especially so as the value of your investment can go up as well as a move against you, resulting in losses.
A veteran advisor told us that investment in the share market should not be made with funds that one cannot afford to lose. ‘one must remember that stocks can go up as well as down. Being aware means knowing when to buy and also knowing when to sell even if it means taking a loss to save the bulk of the investment.’
