The stock of Fine Foods started off on a steep decline more than a week before it announced a record 376 per cent year-on-year profit growth on January 16 for the first half of FY25.
It kept falling even after the earnings disclosure, resulting in a 28 per cent correction in the nine sessions through Sunday.
The stock's movement raised a question as to why the positive earnings report failed to draw in investors. In fact, investors' enthusiasm seems to have faded way ahead of the disclosure.
Market experts attribute this phenomenon to a popular trading strategy known as 'Buy the Rumor, Sell the News'.
Some investors, called news traders, tend to hold positions for a very short time in securities as the impact of news usually fades quickly after information is made public.
Investors, who previously somehow learnt about Fine Foods' profit growth before the announcement, might have taken active positions in the stock.
The stock started climbing up on the Dhaka bourse on August 22 last year. It closed at Tk 148.90 per share that day and peaked at Tk 271.40 per share on January 6, with an appreciation of 82 per cent.
Between January 7 and January 19, the stock witnessed 28 per cent erosion to Tk 194.80 per share.
The investors, who took positions before the rally, started sell-off before the disclosure because they knew the rally would not persist. General investors, who had invested in Fine Foods, encouraged by the rally, might have been caught off guard at this.
On Monday, however, Fine Foods advanced 9.45 per cent to close at Tk 213.2 per share on the Dhaka Stock Exchange (DSE).
"Many investors, who purchased the company's stock, had no faith in it. Otherwise, they would not have offloaded their holdings following the record profit growth," said Md. Ashequr Rahman, managing director of Midway Securities.
A group of investors influence a stock price until a certain time based on inside information and then they make an exit because they know the price momentum will ebb, he added.
There are other examples of abnormal price surge before a disclosure and immediate fall after the disclosure.
Orion Infusion soared in 2022 amid speculation of rights shares. After an abnormal price escalation by 12 times in five months, the stock plunged in November 2022 following a corporate declaration that failed to impress investors.
Past records of Fine Foods
Fine Foods performed very poorly before the record growth.
It incurred a loss of Tk 1.57 million in FY21 and then reported a profit of Tk 0.34 million for FY22. The profit increased slightly to Tk 0.92 million in FY23 and jumped to Tk 12.35 million in FY24.
The auditor gave qualified opinions on the financial statements meant for
FY24.
It said it was unable to verify the authenticity of transactions made in cash due to unavailability of reliable information and the nature of the transactions.
Revenue, receivables
and purchase of raw materials might have been misstated, the auditor said, adding that discrepancies had also been found in inventories.
Signs of worry from key indicators
When the overall market's price-to-earnings (P/E) ratio is 12, Fine Foods' P/E was 53.81 on January 19 based on the latest un-audited quarterly financial statements. The P/E ratio comes to 221.36 based on the latest audited financial statements.
The company retained its status as a 'B' category company, having distributed nominal cash dividends until FY23.
Sponsor-directors of Fine Foods jointly hold 15.25 per cent shares of the
company, according to data available up to December last year, whereas they are obligated by regulations
to have at least a
30 per cent stake in the company.
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