Share Purchases and the Company You Keep

By Mark Story | More Articles by Mark Story

One of the by-products of brokers trimming down their research teams in recent years is that stocks outside the ASX300 often don’t get analysed. Sadly, if brokers don’t analyse stocks, mainstream media is even less likely to cover them.

This makes it doubly hard for mid-cap stocks, and virtually impossible for microcaps, to get the market’s attention. If you want to know why only the large-caps get covered, take a closer look at the composition of the ASX.

While there are around 2185 stocks on the ASX as of today (March 25) the ASX300 comprises 6775 of the All Ords total 7022 points. In other words, around 90% of the stocks listed on the ASX barely ever move the market.

This means any stocks below the ASX300 with good stories – that could propel a share price – have to be a bit more inventive than relying on a release to the ASX or the media to penetrate the broader market.

As you would expect, most stocks pay PR firms to raise awareness of their corporate activity. Then there are companies that might pay for research designed to present the company in the most favourable possible light.

Beware spruikers and their undisclosed relationships

Scratch under the surface of today’s 24-hour media machine, and what’s now also lurking is the emergence of what’s euphemistically referred to as the ‘pump and dump’ brigade. To the uninitiated, ‘pump and dump’ is the illegal practise of artificially spruiking a company’s fortunes, typically to a microcosm of gullible followers, with the express purpose of pumping the price for a quick profit.

Australia is no stranger to small cap promotion sites, the most well-known being Hot Copper which currently generates revenue from commercial and corporate advertising and the provision of investor relation services. However, the recent incentivisation of small-cap promotion sites (aka digital marketing organisations) by having ‘skin the game’ for championing a company’s fortunes, could be the first mutation of something resembling pump and dump taking a toe hold locally.

Hot Copper, by way of example, invests in its clients by taking equity positions of between $25,000 and $100,000, as part of equity capital raisings, which it calls its Capital Raise-Platinum Package.

Is this relationship a bit too cosy?

Another small-cap promotion site StocksDigital recently forged a relationship between Dublin-headquartered Oneview Healthcare PLC (ASX: ONE) and what’s happened since is worth taking note of. Since the start of 2021, the share price of ONE is up a whopping 650%, and up over 1150% in the last 12 months.

Much of the healthcare technology company’s share price fortunes can be attributed to a publicity deal it entered with S3 Consortium, (which trades as StocksDigital) on 12 March. To summarise, in return for sharing research, commentary and investment advice on ONE with its community of investors for an initial 18 months, StocksDigital receives 6,250,000 CHESS depositary interests (CDIs) over fully paid ordinary shares.

This deal effectively avoids ONE having to pay $375,000 in fees for the company’s publicity services. When justifying the deal, Oneview Healthcare highlighted the need to take the initiative in the absence of any coverage of the company. The company also maintained that StocksDigital’s media coverage would strengthen its balance sheet.

Additional to its end of the agreement, StocksDigital and other strategic investors in its network invested $1 million into Oneview Healthcare. In return, 16.6 million CDIs were allotted from ONE to the participating investors. The company set the offer price at 6 cents apiece – which was a discount of 18.9% on the volume-weighted average price of CDIs over the prior 5 trading days. Oneview plans to use this capital to promote of its new cloud platform.

StocksDigital actively promotes the stocks within its stable via a series of email advertisements under several different brands, these include www.wise-owl.com, and www.nextinvestors.com.

StocksDigital founder Damian Hajada told Share Café that the OneView deal is one of many where scrip is involved. But what distances the company from the ‘pump and dump’ brigade, adds Hajada is the AFSL licence under which its three funds operate. As a result, the company is prevented from trading for seven to ten days after its media coverage comes out.

“We’re no different from a VC fund that lists its investment, and see ourselves as more fund manager than media company these days,” says Hajada. “Out of the 400 investments we’re shown annually, StocksDigital invests in around 10 and the disclosure statements that are all over our websites should make it clear what positions we take within the companies we write about.”

Poacher becomes gamekeeper

There are many levels on which this agreement could be construed as questionable. Firstly, it assumes StocksDigital and the market at large is aware of the media relationship with Oneview Healthcare.

Secondly, there’s the danger that the share price is being driven up within a thin vein of StocksDigital’s ‘true believers’. But in fairness, StocksDigital is not alone in this regard. For example, Intelligent Investor likes to recommend to its readers (many of whom invest in its funds) small caps its thinks have big futures. But given the tight liquidity in these stocks, even thin trading by the Intelligent Investor cohort can also give the share price a material nudge up (or down).

What’s going to amplify the buying into Oneview Healthcare by the StocksDigital cohort is the extreme poor liquidity into the stock. For example, while the stock has a market cap a little over $100 million (with approximately 424 million shares outstanding), 76.9% is tightly held by the top 20 shareholders, which means there’s only around $20 million in free-float.

Does the regulator care?

While the regulator (ASIC) has in the past appeared relatively toothless when it comes to calling out borderline practises, it has become increasingly concerned about ‘social trading’ contributing to herd momentum in speculative stocks. Adding to ASIC’s concerns is the clear evidence that rookie investors are increasingly playing in the smaller-end share market sandpit, typically well outside the ASX 300 and deep into penny-hopeful territory.

To highlight the menacing impact of social trading, ASIC noted that between April 6 and June 12 2020 there were 255 ASX-listed companies where share prices doubled, 70 companies that tripled and 29 that quadrupled. Equally revealing, retail investors accounted for 80% of trades of these stocks, despite comprising just 16% of broader market activity.

But what’s even more incriminating is that of these 255 ASX-listed shares, ASIC also noted 80% had negative earnings in FY2019, while the remaining 20% had relatively high price-to-earnings (P/E) ratios (averaging around 55).

Tread carefully when buying ‘blue sky’

There are a lot of exciting stocks listed on the ASX. But it’s important to remember that some of them are being priced on some ballsy assumptions about what they’re going to do into the future.

The buy now pay later (BNPL) sector exemplifies what happens when the market fixates on disruptive technology that takes the world by storm. But at least investors who buy the underlying narrative of stocks like Afterpay (ASX: APT) – which is yet to turn a profit – can take some comfort in knowing the company is covered by most mainstream brokers.

Equally encouraging, despite the price, Afterpay is still trading on a 15% discount to the consensus target of $122.87. But despite the consensus target, not all brokers agree on the fortunes of Afterpay, with Morgan Stanley rating it an overweight on a target of $159 and UBS regarding it as a sell with a target price of only $36.00.

Clearly it’s hard to quantify the blue sky within biotech stocks and mining juniors. But all too often, investors’ desperate to find the ASX’s next Afterpay or Sandfire Resources (ASX: SFR) will in fear of missing out take a speculative ground floor punt and hope like hell that over time their wager pays off.

Don’t be a mug punter, think before you buy penny-hopefuls being peddled by small-cap promo sites.

Mark Story

About Mark Story

A former editor, columnist, and chief reporter on business and financial publications across NZ, Australia, Hong Kong and the US, Mark operates Prime Strategy Media. He divides his time between share market commentary and analysis, B2B, financial, mainstream media, and high level content and strategy for financial institutions.

View more articles by Mark Story →