May 11, 2009, 06.13 PM IST | Source: CNBC-TV18

Analysis: Low stock float doesn't portray sharp spikes

There is a general trend for the people and even analysts to believe that if the float is low then there are tendencies for a sharper spike. However, the weekend research clearly showed that this is not the case. It has been found that the companies which have low floating stocks and are smallish-type of counters are easy to manipulate.

There is a general trend for the people and even analysts to believe that if the float is low then there are tendencies for a sharper spike. However, research clearly shows that this is not the case. It has been found that companies which have low floating stocks and small counters are easy to manipulate. However, it has also been found that generally mid-tier to larger-cap companies, where floating stocks are lower, generate a mixed bag of returns.

Also Read: DLF buyback closes ahead of schedule, buys up 0.44% equity

Here is a verbatim transcript of Haresh Sonejis comments on CNBC-TV18.

There is a general tendency for the people and even analysts to believe that if the float is low then there are tendencies for a sharper spike. However, the weekend research clearly showed that this is not the casein fact we have four such examples which though differential trends.

The companies which have low floating stocks and are smallish-type of counters are easy to manipulate and we have seen that happening in the recent past Akruti City being one of them. But then generally mid-tier to larger-cap companies, where floating stocks are lowerwe found that such companies generate a mixed bag of returns. They do not move up as sharply as the markets have gone up. Some of the companies in fact deliver higher returns. We have seen such companies, which have lowered the free float in the marketthat is the promoters have gone ahead and bought the stake.

BOC India , a 90% subsidiary of BOC UK, has a promoter stake of 90% and it has just moved up 27% since the March lows. The company is looking at delisting itself for quite sometime now.

Gokaldas Export bought over by Blackstone has moved up 41% and the promoter holding is close to about 88% in that counter. So these two companies are clearly underperforming the general trend in the market. The benchmark Sensex which has moved up close to about 50% since the March 9, lows.

On the other hand, Plethico Pharmaceuticals with a promoter holding of about 87% has moved up 94% but then there is no differential trend over here. We have seen other pharma companies also moving up as aggressively.

Aztecsoft Software which was taken over by Mindtree with a promoter holding of close to about 80% has moved up 80%.

We have seen certain smallcap and midcap companies, including Infotech Enterprises and some other IT space companies also moved up drastically.

With decent size companies, which have good corporate governance issues, one can clearly call that there is no cornering of shares going around. However, we have also seen certain companies where management could be a certain grey areas thrown over the management issues, certainly those companies have a swing at the equity markets.

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