Beware of the irrational speculation risk of ST stocks

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Source: Beijing Business Daily

Recently, some ST stocks (including *ST stocks) have strengthened against the trend, and some funds have been betting early on the prospect that these companies will remove the risk warning. However, the investment risk of ST stocks is far higher than that of ordinary shares. Whether they can successfully remove the risk warning is highly uncertain. Even if they do succeed, there are still questions about whether their actual profitability can remain sustainably stable. Therefore, investors should still stay away from irrational hype in ST stocks.

Public companies under risk warning measures generally have core issues such as persistently weak operations and poor financial conditions. The logic that market funds bet on regarding removing the risk warning already contains a high degree of uncertainty. Whether the relevant listed companies can meet the requirements for removing the risk warning through operational improvement, asset integration, and other measures involves many variables, making it difficult to determine the final outcome in advance.

Even if some companies manage to remove the risk warning smoothly, that only means the risk-warning status is lifted, and it does not imply a fundamental improvement in operating quality. The sustainability and stability of their subsequent earnings, as well as the continuity of their business, still need to be continuously tested by the market. Trading based solely on expectations of removing the risk warning is, in essence, a high-risk speculative behavior and does not provide a foundation for sound investing.

From the market’s operating characteristics, the stage-by-stage rise in ST stocks is often driven by short-term funds, and the stock price movement has a relatively low correlation with the company’s intrinsic value. These funds typically operate with a fast-in, fast-out approach. After the stock price is quickly driven up, they are likely to exit early, which easily leads to large fluctuations in the stock price. In addition, since some ST stocks have relatively limited liquidity, once market sentiment turns, they are prone to continuous one-way declines. Investors find it difficult to control losses in time, and the risk transmission speed is fast.

As the capital market’s basic institutional framework keeps getting improved, the enforcement strength of the delisting mechanism continues to increase, and the market-clearing speed has clearly accelerated. In the past, the shell-resource-hype logic in the market has gradually weakened. The room for valuation supported by concept-driven narratives has been continuously compressed. Listed companies that lack real operating support find it hard to stay detached from fundamentals for the long term. If investors blindly follow and hype these stocks, they not only face the risk of large stock-price swings, but they may also confront the possibility that the company’s operations worsen further and even face delisting. Ultimately, this can result in substantial real investment losses.

For ordinary investors, a more reasonable choice is to buy and hold listed companies with stable operating conditions and the ability to generate sustained earnings. The core of value investing is to obtain a reasonable return brought by the company’s operations, not to gamble on uncertain theme concepts. While hype in ST stocks may generate stage-by-stage gains in the short term, the potential risks are far higher than those of ordinary stocks, and it is not suitable for most investors to participate.

Healthy operation of the capital market depends on a rational pricing mechanism and rational investment behavior. Excessively hyping ST stocks is not only unfavorable for the efficient allocation of market resources, but also easily leads investors to form irrational trading habits. When facing various hot theme opportunities in the market, investors should always use fundamentals as the core basis for judgment, adhere to rational investing principles, and avoid the potential risks brought by irrational hype. This is also an important prerequisite for maintaining steady, long-term investing in the capital market.

Of course, if ST-type companies truly have substantive improvements in their main businesses, and if there is a future trend of sustained improvement in their main business, then such ST stocks could also be included within the scope of value investing. It’s just that there are not many ST stocks that can truly make a dramatic turnaround. Unless investors have full confidence, it is still better to be cautious.

Beijing Business Daily commentator Zhou Kejing

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