Stay away from 'Operator driven stocks'

As the year 2010 draws to a close, our stock markets are gaining strength, and are likely to test the previous highs in the next couple of weeks. But, there is a word of caution for the retail investors not to be carried away by the euphoria, and desist from investing in 'operator driven stocks' based on hearsay. Some investors may have been lucky to have made money in these stocks provided they offloaded them in the last bull run, but most investors have burnt their fingers by investing in these stocks. SEBI has cracked its whip on the activities of these operators a.k.a manipulators on several occasions, but their activities are not fully curbed. The last leg of the bull run is best used by these operators to jack up the prices of their favourite stocks. This month SEBI order pulled up the promoters of companies like Welspun Corp., Murli Industries, Ackruti city, and Brushman India for allegedly rigging the stocks of their companies in collusion with some dubious operators.

How does one identify an 'Operator driven stock':

• Sharp price movements in both directions - These stocks generally swing between locking consistent upper circuits to getting frozen at lower circuits. It is very difficult to get out if you have purchased the stock at a higher level.
• Small market cap. - This enables the operators to manipulate the price with limited funds deployed. The penny stocks are often recommended by unscrupulous publications through SMS and mails, as the cost of the same is low. This helps in creating volumes in these stocks.
• High PE multiples - These stocks often quote at very ridiculous PE multiples, which are often justified by the news flow regarding order book of the company, although the company may lack the execution capability. Investors must check the PE multiple of the industry, small cap stocks normally would not sustain a higher PE multiple as compared to the industry leaders.
• New listings - During the bull run some dubious companies are able to demand high premiums for their IPOs which are manipulated in the early days of listing. More than 50% of the companies that came out with new issues during 2010 are quoting at heavy discount to their offer price.

It is not going to be easy to make money on the equity markets in 2011. Retail investors are advised to stick to large cap stocks with good track record of performance and reliable managements. Investment in mid and small cap stocks are advisable only after thorough research, keeping in view the above factors.