Is penny stocks' surge an apparent signal for bubble?

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Experts say current overheat is natural consequence of loose monetary policies

By Anna J. Park

Based on ample liquidity in the global market, some penny stocks ― stocks that are traded at very low prices ― have shown double-digit or triple-digit growth during the past few months or weeks.

Cannabis stock Sundial Growers has spiked as high as $3.96 per share from $0.25 just three months ago. The price fell back to $1.53 Friday, yet it's still sitting at 600 percent growth from late November. Cyprus-based Castor Maritime stock also skyrocketed to $1.73, Feb. 11, a more than 1,000 percent jump from its price of $0.15 three months ago.

The tendency has also been seen on the Korean stock markets as well. As the nation's benchmark KOSPI hovered around a boxed range between 3,000 and 3,200 over the past few weeks, retail investors seeking to maximize profits in a short period of time have increasingly flocked to these penny stocks.

According to recent data compiled by the Korea Exchange (KRX), four out of the most net-purchased top 20 stocks in January were penny stocks. But in February, out of the most net-purchased top 20 stock items, 10 were penny stocks with low market cap sizes, including E Investment & Development (EID), Seoul Food Industrial Co. and Q Capital Partners.

Seoul Food Industrial, in particular, is continuing a bull run, after it got investors' attention for robust sales of food items such as frozen croissant dough through e-commerce giant Coupang. Triggered by Coupang's upcoming IPO on the NYSE, the stock price rose by more than 110 percent in three weeks, reaching an all-time high of 415 won at 3 p.m. Monday, from 196 won ($0.18) on the first day of trading in February.

The shift of retail investors' most net-purchased stock items is evident, given that they focused on buying large-cap blue-chips such as Samsung Electronics and Hyundai Motor in late December and early January trading.

While some market watchers call this a "circulatory rally" ― meaning that once the bull run of large market cap stocks has become somewhat subdued, less-focused on small cap stocks move upward in turn ― voices of concern over the increasing separation between corporations' fundamentals and stock prices have also begun to be heard.

"As volatility in future interest rates and policy directions is increasing, one needs to closely assess a company before making an investment decision," said Choi Yu-june, an analyst at Shinhan Financial Investment.

However, experts also say the current phenomenon of a bull run on penny stocks run should be seen as "market overheating," rather than a "bubble."

"I think penny stocks' price surges could more aptly be described as market overheating, rather than a bubble, because it is a natural consequence of the current monetary and fiscal policy directions in the global market," Lee Hyo-seok, an analyst at SK Securities, said.

"Many people voice caution over the current market situation that it's heading to an apparent bubble period. Yet one needs to remember that the regulatory authorities are well aware of the situation. Knowing about this market overheating, they are still maintaining their monetary expansion policies for the sake of a sound level of employment."

He also explained that even though the U.S. Federal Reserve is aware that excessive liquidity in the market creates overheating as in the penny stocks hikes that could be seen as highly speculative, they have decided to continue to support monetary expansion at the risk of a potential bubble. That's because they regard that buttressing of a healthy employment level to be significant until the economy's full recovery, which is still far away.

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