Kan Gu: Beware of the irrational speculation risk of ST stocks

Recently, some ST stocks (including *ST stocks) have strengthened against the trend, and some capital has moved in early to bet on the expectation that they will be delisted from ST status. However, the investment risks of ST stocks are far higher than those of ordinary shares. Whether they can successfully remove the ST designation is highly uncertain. Even if they do manage to get delisted, there are still questions about whether their real profitability can remain steady and stable. Therefore, investors should still stay away from irrational speculation in ST stocks.

Listed companies under risk warning measures mostly have core problems such as persistently weak operations and poor financial conditions. The logic behind the market’s capital betting on removing the risk warning status is itself highly uncertain. Whether the relevant listed companies can meet the requirements for removing the designation through business improvement, asset integration, and other means involves many variables in the process, and the final outcome is difficult to determine in advance.

Even if some companies manage to remove the designation successfully, it only means that the risk warning status has been lifted—it does not indicate a fundamental improvement in the quality of operations. The subsequent stability of earnings and the continuity of the business still need to be continuously tested by the market. Trading purely based on expectations of removing the designation is, in essence, a high-risk speculative behavior and does not provide a foundation for stable investing.

Judging from the market’s operating characteristics, the phase-by-phase rise of ST stocks is usually driven by short-term capital, and the stock price trend has a relatively low link to the company’s intrinsic value. This kind of capital typically uses a “fast in, fast out” operating mode. After the stock price is quickly pushed up, they are likely to exit, leading to large fluctuations in the stock price. In addition, liquidity in some ST stocks is relatively limited; once market sentiment shifts, it is easy to see a continuous one-direction downturn. Investors then have difficulty controlling losses in a timely manner, and risk spreads quickly.

As the capital market’s basic institutional framework continues to improve and the enforcement strength of the delisting mechanism keeps increasing, the market’s pace of clearing is clearly accelerating. In the past, the shell-resource speculation logic that existed in the market has gradually weakened, and the room for valuation supported by concepts has been continually compressed. Without real operational support, it is hard for listed companies to keep running away from fundamentals for the long term. If investors blindly follow and speculate, they not only face the risk of large stock price volatility, but may also be exposed to the possibility that the company’s operations deteriorate further and even leads to delisting. In the end, this can result in substantial real investment losses.

For ordinary investors, a more reasonable choice is to buy and hold listed companies whose operating conditions are stable and that have sustainable profitability. The core of value investing is to obtain reasonable returns brought by the company’s operations, not to gamble on uncertain thematic concepts. Although ST stock speculation may deliver phase-by-phase gains in the short term, its potential risks are far higher than those of ordinary stocks and is not suitable for most investors to participate in.

The healthy operation of the capital market relies on a reasonable pricing mechanism and rational investor behavior. Excessive speculation in ST stocks is not only harmful to the effective allocation of market resources, but also can mislead investors into forming irrational trading habits. Faced with various market hotspots and thematic plays, investors should always use fundamentals as the core basis for judgment, adhere to the principles of rational investing, and avoid potential risks caused by irrational speculation. This is also an important prerequisite for maintaining steady investment over the long term in the capital market.

Of course, if ST-type companies genuinely have substantive improvements in their main businesses and there is a trend for their main businesses to keep improving in the future, then such ST stocks can also be included in the category of value investing. It’s just that ST stocks that truly make a dazzling turnaround are not common. Unless investors have full confidence, they should still be cautious.

Beijing Business Daily Commentator Zhou Kejing