Individuals to continue trading risky securities despite obvious pitfalls

By Kim Da-ye

Can the financial watchdog make a stronger warning against theme stocks than identifying them — precisely creating themes with malicious intent — as one of the four major financial crimes against the working class along with voice phishing, insurance fraud and loan scams?

Despite Financial Supervisory Service (FSS) Governor Kwon Hyuk-se’s recent remark, theme stocks apparently haven’t lost their allure to individual investors who are aware of their obvious pitfalls but continue trading them for short-term gains.

When the death of Kim Jong-il was made public on Dec. 19 — only a few weeks after the FSS and the stock exchange began cracking down on stock price manipulation through theme stocks — the North Korea theme emerged.

Many companies in the defense industry saw double-digit growth in their share prices while businesses involved in the economic cooperation between the two North Koreas inched up. Speco, which produces parts for military vessels, gained 14.91 percent on Dec. 19 and 14.89 percent on Dec. 20.

Theme stocks are a group of securities related to a certain subject such as welfare or carbon emission credits. Several securities firms’ home trading systems and the financial sections of major Web portals including Naver and Daum list tens of themes with belonging stocks including “beneficiaries in winter,” “mad cow disease,” and “free school meals.”

For example, GS Engineering & Construction (GS E&C), Daewoo E&C and Hyundai E&C belong to the theme of “rebuilding Libya.”

One noticeable trend among these stocks is that the themes have become increasingly abstract.

One of the latest popular ones is “politicians.” Shares of companies that are rumored to be linked to presidential candidates in next year’s election or to their policy interests have been shooting up for no clear reasons.

After Park Geun-hye, the presidential front-runner of the ruling Grand National Party, emphasized measures to boost the low birth rate in an interview with a TV station in early December, baby clothing maker Agabang & Company’s stock price more than doubled from 11,000 won on Dec. 5 to 21,400 won on Dec. 21. Boryung Medience, which produces skin-care goods for babies, also saw its stock price jump from 18,250 won to 25,300 won during the same period.

The price of EG, an oxidized steel maker, nearly trebled from 27,850 won to 65,800 won because the firm’s major shareholder is Park’s brother, Ji-man. All three firms are listed on the KOSDAQ market of the Korea Exchange (KRX).

Many investors are putting capital into these companies even without looking into their earnings just because of the fuzzy connection to the politician. The presidential election is still a year away.

The same has been seen with shares related to the North Korean theme. It is generally agreed here that a war between the divided nations is unlikely.

“These types of theme stocks climb up fast in a short period of time on baseless expectations. There is no guarantee that a company’s relationship with a politician will improve its value or earnings,” said an analyst who did not want to disclose his name.

At the end of the day, most retail investors buy theme stocks for short-term gains. Their purpose is often jumping on the upward bandwagon and getting off just before it crashes.

Many of them are aware that certain themes do not have anything to do with the value of the firms they are investing in, but they simply want to profit from the rally fed by rumors.

Because the price change of theme stocks tends to be extremely volatile, many individuals end up missing the right timing for their exit and lose massively.

The analyst said that he assumes most of the theme stock buyers are individuals, not institutional investors.

Institutions wouldn’t buy theme stocks solely to briefly join the rally because they look to avoid high risks and uncertainties, he said.

Then who creates themes and decides which companies belong to which one? Market observers couldn’t identify them, but said that themes are formed after noticeable movement in a company’s stock price, not prior to it. They added the media are largely responsible for inventing flashy themes after certain shares gain for no clear reason.

One market intelligence firm called Infostock specializes in providing in-depth data on theme stocks including the history of the theme to securities firms and Web portals.

It says on the website that when a certain issue gives a birth to a new theme, it evaluates companies and categorizes relevant ones. But it doesn’t say it invents or names a theme.

The financial authority and the stock exchange are now suspicious that stock price manipulators may be behind spreading rumors that cause some companies to be categorized under a popular theme and gain massively.

The FSS said on Nov. 21 that it will monitor broadcasting channels specialized in covering the stock market, online communities known as Internet cafes here and social network postings about listed firms’ relationship with politicians, false or exaggerated data about their businesses and company analyses that lack evidences.

For now, the FSS is looking into the KOSPI-listed clothing company Daehyun after its stock shot up nearly 350 percent between June 20 and Aug. 25 after a photo of its CEO and Moon Jae-in, a potential presidential candidate, posing together circulated in the Internet. The man in the photo turned out not to be the CEO of the company.

Another firm under investigation is Solco Biomedical whose non-executive director was found in a photo posing with Ahn Cheol-soo, an entrepreneur and possible presidential candidate.

Ahnlab, which Ahn founded, is also being inspected as its second major stock holder, Won Jong-ho, increased his stake from 9.2 percent to 10.8 percent between March 2009 and the third quarter this year without filing reports to the financial authority. Ahnlab is one of the biggest beneficiaries of the founder’s political popularity.

Despite the crackdown, experts say theme stocks in general will continue to thrive.

The KRX has served several warnings against these types of shares for over five years.

In June this year, the stock exchange operator warned of themes related to resource development after the CEO of Gloworks spread false information about an overseas project.

The KRX said that 28 companies had made public disclosures on their resource development projects since 2007 and 18 of them are now either delisted or designated as “marginal firms.” Fifteen of them embezzled money by issuing more stocks on the basis of their non-existent resource development projects.

Yoo Wook-jae, the small cap team leader at IBK Securities, said that the recent popularity of theme stocks may be caused by the bear market. Because most sectors are losing or remain stagnant, people now look for new sources of profit-making.

“In the long run, institutions will take a larger portion of the market and long-term investment based on firms’ earnings will become more common. As a result, short-swing trading would decrease, and then theme stocks are likely to lose their allure,” Yoo said.