When shares head below 20c

Friday 27th July 2001

By Peter V O'Brien

The natural desire to broadcast winnings and keep quiet about losses applies as much to the sharemarket as to playing the horses and other forms of gambling.

While some people made solid gains from shares in the past 18 months, there were big losses, particularly among the e-commerce and other technology-related stocks.

The table shows 14 companies whose shares prices at July 20 were less than 20c, the high since January 2000, the percentage change since then and market capitalisations last Friday. Many other companies lost as much in terms of share price than those on the list but it was decided to confine the comparison to prices currently less than 20c.

Eight of the 14 have links to e-commerce or other technology.

Percentage losses for those stocks would be much greater if the "high" column was taken back to late 1999 when such companies were bid up as part of a worldwide mania for anything that could be seen to participate in a perceived boom in technology.

Statements from some of the eight companies included in the table are still relatively buoyant about prospects, particularly when they announce full or partial acquisitions and/or technical and marketing agreements and new shareholders.

They could be right in the long-term but equity investors decided otherwise.

That does not mean the whole sector should be written off - some companies' shares held up reasonably well in the period covered - but massive price erosions were an indication of what happens when a sector becomes a fad and attracts numerous new entrants.

There is some consolation for investors in the point that the market capitalisation of the 14 companies last week was only 0.23% of the total New Zealand market, including the local part of overseas-based groups.

Market capitalisation calculated from the 2000/01 highs would admittedly be much higher but calculating a total figure for 14 companies on that basis would be artificial. The highs came at different times and company capitalisations and the total market capitalisation change daily. At least the figure taken last Friday compared apples with apples.

Specific reasons for price declines were different for each company but the situation in National Mail was among the more interesting, due to the later regulatory fallout.

National Mail said in December last year it would pull out of mail distribution because losses were unacceptable.

The company's annual meeting in March was told remaining assets would be sold in an orderly manner, the group was still solvent and new directions would be sought.

It seems that, subject to orderly disposal of assets at realistic prices, National Mail should become a cashed-up shell looking for a change in operations. Either that, or winding up, appear the only alternatives.

The Securities Commission got interested and investigated the possibility of some insider trading on December 4, seven days before the company's surprise announcement.

Investigation was based on the sale of 1.19 million shares at 55c on December 4 and was, in the commission's words "to ascertain whether any person selling shares had inside information about the deteriorating circumstances of National Mail."

The commission said it interviewed brokers, directors of National Mail and other people about the circumstances of the trading, the motivation for selling, their links with National Mail and their state of knowledge about the company.

It decided, on the evidence, not to take the matter further.

There was certainly no insider trading involved on the buyer's part, having paid 55c for the shares.

Suspicion arises when a share price suddenly tumbles and a check of turnover shows heavy transfers just before the fall or an unfavourable announcement.

The commission's exhaustive inquiry cleared people who had any remote connection with National Mail, but, even under tight controls, it is almost impossible to detect insider trading unless the perpetrators were stupid.

It is easy for people to pass on information to others with whom a direct or indirect connection could never be traced.

Relatives or business associates can be traced with relative ease and matched to shares' buys and sells. How do you connect someone with their social or semi-social "mates" who had a few discreet drinks in a watering-hole far removed from the popular haunts of people connected with the securities industry or industry and did a deal to share the profits?

Such "waterholding holes" can include private residences where connections between individuals can never be made.

Company share price declines
Company	Price c 20.7.01	High c 2000/2001	% Change high	Mkt capt 20.7.01 $'000

Applefields	9	15	-40.0	2632
AQL Holdings	1.8	23	-92.2	4520
Beauty Direct	11	32	-65.6	3080
CDL Inv	18.6	24	-22.5	34,150
E-cademy	1.2	9	-86.7	1782
IT Capital	14	105	-86.7	26,437
Newcall	5.5	74	-92.6	7392
National Mail	8	138	-94.2	2209
NZ Experience	11	15.5	-29.0	6164
Selector	3.6	27.6*	-86.9	3068
Seafresh	5.2	14	-62.8	3432
Strathmore	6	62	-90.3	10,847
Spectrum	3.1	20	-84.5	9603
Savoy Equities	7.8	100	-92.2	4366
Total				120,082

*Adjusted for issue

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