The SME stock index soared more than 43 per cent in the six months through June 22 this year, driven largely by abnormal gains in most stocks despite weak corporate earnings and the absence of significant business developments.
Data shows that 17 out of the 20 listed SME stocks registered gains ranging from a modest 0.5 per cent to as much as 153 per cent during the period. As a result, the market capitalisation of the SME board climbed more than 38 per cent to Tk 24.16 billion.
Many of the SME stocks experienced unusual upward movements despite reporting lower earnings, stagnant business growth and no major corporate disclosures that could drive such substantial price surges.
The SME sector's financial performance remained under pressure in FY25 as economic activity slowed following the political transition in August 2024. Most SME companies reported year-on-year profit declines for the fiscal year amid weak demand, higher operating costs and cautious business sentiment.
Against this backdrop, investors chased SME stocks, raising concerns that the rallies were driven by speculative trading and market manipulation.
Prices of four SME stocks - Al Madina Pharma, Apex Weaving, Master Feed and Web Coats - more than doubled on the platform during the period.
Al Madina Pharma's stock jumped 153 per cent to Tk 71.3 per share since December last year, despite the company reporting a 33 per cent decline in profit year-on-year to Tk 11.8 million in FY25.
Following the abnormal price surge, the Bangladesh Securities and Exchange Commission (BSEC) asked the Dhaka Stock Exchange (DSE) to investigate the trading activities surrounding the stock.
The probe will examine whether there was any coordinated market manipulation, abnormal trading activity among investors, or insider trading involving undisclosed price-sensitive information.
Apex Weaving and Finishing Mills also saw its stock price double from the level of December 30 by June 22, even though production at the company has remained suspended for a prolonged period due to gas and electricity disconnections and unpaid utility bills.
Web Coats, a manufacturer of premium paper and board products, posted a 151 per cent rise in its stock price to Tk 28.9 by Monday, although its profit fell 29 per cent year-on-year to Tk 38.4 million in FY25.
"The limited free-float shares and relatively low liquidity of SME companies make them vulnerable to speculative trading," said Md Sajedul Islam, a director of the DSE.
When the broader market shows a rising trend, some investors tend to flock to speculative stocks in pursuit of quick gains, causing prices to surge without any fundamental reason, he said.
Mr Islam advised investors to remain cautious and focus on companies with strong earnings prospects, sound corporate governance and sustainable business models instead of chasing momentum-driven rallies.
Akramul Alam, head of research at Royal Capital, said many investors were increasingly betting on small-cap companies to make quick profits as the broader market maintained an upward trajectory over the past several months.
The benchmark DSEX of the prime bourse gained nearly 14 per cent, or 689 points, during the six months through Monday, supported by expectations of stronger regulatory reforms to deepen the capital market under the newly elected government.
However, Mr Alam warned that SME companies generally carry higher business and liquidity risks than large-cap firms.
"Investors should carefully examine financial statements, governance practices and business fundamentals before making investment decisions," he said.
Meanwhile, two SME stocks that previously played a major role in driving the SME index higher - Himadri and Yusuf Flour Mills - experienced significant corrections during the period.
Himadri's stock price fell 27 per cent to Tk 480 per share between December 30 last year and June 22 this year, while Yusuf Flour Mills dropped 26 per cent to Tk 1,622 during the period.
The Financial Express previously published a series of reports highlighting abnormal price movements in several SME and small-cap stocks, particularly Himadri and Yusuf Flour Mills.
Little-known SME stock Himadri exhibited abnormal price increases, reaching Tk 10,000 per share in November 2023 despite a lack of supporting fundamentals.
In November 2024, the securities regulator fined one individual and three firms a total of Tk 17 million for manipulating Himadri's stock price.
Yusuf Flour Mills peaked at Tk 6,352 in June 2024 without any apparent reason for investors to bet on the stock, leaving market experts in awe, as shares of many well-performing firms offering handsome profits and dividends were nowhere near that level.
Even after the corrections, Himadri and Yusuf Flour Mills remain significantly overvalued, with price-to-earnings (P/E) ratios of 126 and 114 respectively as of Monday.
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