Courier Mail 20/08/05 HOOK, line and sinker . . . companies too small for institutional investors are often a money pit for mum-and-dad shareholders.
Tiddlers can turn into titans – if only
They're worth about a penny, and they're often dreadful . . . so why do so many bottom fishers follow some of the smallest stocks on the market? Liam Walsh reports 20aug05 A FLURRY of activity last week surrounded Takoradi, a Sydney-based minnow combining the odd elements of mobile phone technology created in the UK and gold exploration in West Africa.
More than 32 million shares traded in a company whose board includes 1980s mining figure Rodney Hudspeth and an ex-commander of the Ghana Navy – one Rear Admiral C. Kevin Dzang.
Takoradi ended the week with a placement of 167 million shares but what was driving the earlier excitement was unclear.
Perhaps the commodities boom is sparking interest – not that it sparked a massive windfall for traders in a company with 1.1 billion shares on issue.
That's because shares in Takoradi, which has lost millions of dollars since listing in 1987 and is not generating any revenue, only rose from 0.3¢ to finish the week at 0.4¢.
It's one of the so-called "penny dreadful" stocks, a company with dirt-cheap shares attracting dreams of a big payoff.
They can be miners or biotechs or information technology companies. Often they reinvent themselves to suit each new passing investor fad.
In recent months the appetite has turned to any uranium-tinged shares such as 1250 per cent climber Deep Yellow. But overheating signs are emerging, much like the dot-com craze at the turn of the millennium.
Further, new research from Queensland University suggests that in a time when everyone perceives the sharemarket is booming, almost half the stocks in the sub-10¢ range posted a negative return over the past 12 months. The upshot is that many a dollar has been burned on these bottom-dwelling stocks.
The derivation of the term "penny dreadful" is not clear – in the 19th century it referred to a cheap, lurid novel. Renton's dictionary of stock exchange and investment terms describes it as: "A low-priced speculative share, usually in a company engaged in mineral or oil exploration".
There's no hard-and-fast limit to a penny dreadful's share price or market cap, but they are generally small.
For day traders, they offer a quick buck via a simple strategy: Buy a bunch at something like 0.5¢, hope they catch fire and offload them at 0.9¢. Even 0.6¢ will give you a 20 per cent turn – and that, many gamble, might be a lot quicker than waiting for a $20 stock to reach $24.
These same companies are too small for institutional investors and often a money pit for mum-and-dad shareholders.
"This part of the market is about as close as you get to going to the casino," says Clive Gaunt, a senior lecturer at UQ's Business School. More than 320 listed companies out of about 1600 are below the 10¢ barrier.
"A handful of those would pay a dividend . . . the vast majority lose money," says Gaunt, who avoids the sector. "The vast majority of these things amount to nothing in the long run."
Many are story driven start-ups. Just consider Queensland's Seafood Online, an internet fish-selling venture which listed at 21.5¢ in 2000 and fell apart within a year at 7.2¢.
"Someone's got some great idea about some new product or technology that they think could make a fortune and can mount a case initially for people to back them," Gaunt says. "But most of these things never come to fruition in the timeframe that the original promoters suggest that they will.
"Often they're back to shareholders saying, 'Well, we didn't get quite where we wanted to . . . we need some more money'.
"That goes on ad infinitum until, I guess, they do come up with the goods which is rare or shareholders have a gutful and they won't cough up any more."
Gaunt has analysed results of 10¢ and below stocks from August last year to now.
The results are conservative because matches for 77 stocks were unavailable – which Gaunt suspected was often linked to company failure.
Shareholder returns on the 289 "survivors", including those making massive jumps like Deep Yellow, is an average 44 per cent.
But ranking of those companies shows the return is 0 per cent or worse for the last 150. Gaunt says there was almost the same number of negative returns as positive ones.
Tricom senior resources dealer Rob Willis says while some smaller caps have potential, there are "pockets of the market which are getting a little too hot like uranium".
Sure, the regulatory environment is improving but he says some companies face an uphill battle to get into production.
"There are definitely penny dreadfuls out there that are . . . dreadful.
"They're run by dreadful people and they're dreadful projects and they're really just mining the market and not planning to mine any resources," he says.
Wilson HTM financial adviser Lachlan McLean says penny dreadfuls are not traded on fundamentals and the day traders are the main players. "For the most part, I won't offer any advice in the area," he says.
That reluctance extends to the big financial institutional investors such as fund managers.
It makes life hell for these companies to raise cash. "You're definitely out of the institutions' range," says Mike Veverka, chief executive officer of Jumbo Corporation. "As a 2¢ stock, institutions don't want to know you."
Veverka feels Jumbo, which has a licence to sell lottery tickets online and offers e-retailing, has shaken off the "penny dreadful" tag.
With its shares around the 7¢ mark, others may not agree but Veverka is optimistic.
"The volumes have returned and we've made it through," he says.
Jumbo posted a $247,000 profit for the half year.
Veverka attributes the share price climb to a recent profit upgrade along with the online-lottery company purchase.
There were, he says, lessons learned when the shares hovered around 2¢.
"It does teach you a lot of discipline," he says. "When a company's flying high and got a high share price and everything, the directors tend to make mistakes because the mistakes aren't so drastic.
"When your back's against the wall there's no margin for error."
Many penny dreadfuls most likely are hoping to be the one that makes it out of the hole.
One that has jumped massively is online travel agent Webjet. It has been reporting strong sales growth and its shares this year have lifted from 4.5¢ to 30¢.
But many go the other way.
"You're buying hope," says Associate Professor Raymond da Silva Rosa, from the West Australian Centre for Capital Markets Research.
So where's the next penny dreadful boom? Da Silva Rosa – purely speculating – suggests age care might be a sector as someone tries to make money on population changes.
"It really depends on what captures the popular imagination," he says.
"That's where new technology helps."
Back at Takoradi, the company hopes its underlying assets and management will help it revive.
Executive chairman Hudspeth argues that many losses were incurred by previous management and the company is now being supported by its major shareholder.
"To use the word 'penny dreadful', I think is not necessarily always an accurate reflection of business opportunities of some of the small companies, because small companies can be rejuvenated successfully – very, very successfully," he says.
