DAYEN, whose share price tripled within two days of its listing this week, is being probed by the Singapore Exchange on talk that the stock has been cornered. It has unwittingly lit up the 'danger' sign for the risky but rewarding-so-far game of investing in penny stocks. In the last few months, investors had enjoyed double-quick gains of an eye-popping scale. And they needed to put down very little capital. Penny stocks - defined loosely as those with prices below $1 and whose companies have market values of merely tens of millions or at most $100 million - are favoured almost exclusively by small investors. And these players have moved with the times: If they used to trade on rumours, now they are turning to the Internet for stock ideas from brokers. In the past few months, big and sudden moves in the prices of penny stocks can be attributed to upbeat analysts' recommendations. The power of the Internet - allowing hundreds of thousands of clients to access informa- tion simultaneously - means that analyst output may be acted on quite fast. Such information is posted on the brokers' websites usually before the market opens at 9am. Says OCBC Securities research manager Gregory Yap: 'Before e-mail was introduced and when information distribution was via fax or snail mail, you wouldn't have seen such sharp immediate gains.' Though retail investors are pouncing on penny stocks, they do not just pick up any stock. Mr Teo Hiang Boon, a vice-president of GK Goh Research, says: 'Investors are hungry for new ideas, stocks that have fallen out of the radar screen for a long time. 'For example, a few weeks ago, after a few houses recommended Teckwah, it moved up strongly.' Teckwah? Isn't that a small printing company? Well, like other hot stocks, Teckwah Industrial is being touted by analysts as a growth story: It has re-engineered itself to help manage the supply chain of the likes of IBM, Hewlett-Packard and Microsoft. Its stock started the year at 17 cents with an average of 100,000 shares traded a day in the first week. On April 4, the stock zoomed up five cents to 26.5 cents on frenzied trading of 8.3 million shares. The reason: Word had spread that Teckwah had hosted a visit by several analysts, says OCBC Securities' Mr Yap. The next day, as their 'buy' recommendations were uploaded onto the Web, the stock shot up another 4.5 cents on an even heftier volume of 27.9 million shares. That makes an astounding 44 per cent gain in just two days. Another recent hot stock was Integra2000, which provides human resources and payroll software solutions. On April 11, when OCBC Securities and Kim Eng Securities put out 'buy' recommendations, the stock rocketed four cents or 42 per cent to 13.5 cents. Doesn't such a sharp run-up suggest indiscriminate buying? Mr Vasu Menon, chief editor of unit trust distributor finatiQ.com, says: 'Generally speaking, after being burnt in the past few years, people have become a lot smarter and will buy only if they can see good stock fundamentals. 'They are discovering companies that sell for price-earnings ratios (PER) of less than 10. Take the case of Total Automation, which Kim Eng visited and wrote a report on. Its PER was only about five times. 'At such levels, investors recognise there's little downside risk.' Conversely, they are shying away from blue chips. Ms Kerryn Tay, a vice-president of GK Goh Research, says: 'After a run-up late last year, many blue-chip stocks are now at a level where you don't want to sell them but they are not low enough to buy more of.' Not surprisingly, penny stocks accounted for all but one of the top 50 gainers, in percentage terms, between Jan 2 and April 17, figures from financial data provider Investamatic show. Their gains ranged from 62 to 281 per cent. The benchmark Straits Times Index, in comparison, rose only 9 per cent. Penny stocks are getting much attention in part because starting from the middle of last year, investors do not have to be a client to get free access to recommendations on brokers' websites. Such websites include: GK Goh; OCBC Securities; DBS Vickers Securities;and Kim Eng Securities. Often the recommendations at these sites are re-posted by investors in the popular www.share investor.com forum. This multiplies manifold the power of analysts to move stock prices - and generate higher broking commissions for their companies. Furthermore, in the case of GK Goh at least, its clients do not have to go looking for information. More than 5,000 of them receive daily stock commentaries by e-mail. But if you think that you have finally found the secret to instant riches, be warned. 'The attention span of investors has been getting shorter in the last few weeks. 'Recommended stocks can run up for a day or two, then fizzle out,' says Mr Yap. Gains will be harder to come by as many of the quality stocks have been discovered already and what is left may be of lower quality. So be very discerning about what you buy. Whether stocks are backed by analysts' recommendations or not, remember there is no sure thing in the market. One more thing to keep in mind: Valuing a company is an art, and analysts vary in perception and even intention. This may not have a Singapore connection but the credibility of analysts in the United States has been hit, partly because some big-name analysts have promoted Internet stocks purely so that their firms could land lucrative investment banking business. >>The Straits Times<<
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