Theme stock prices soar on politician-related rumors

Theme stock prices soar on politician-related rumors. September. 21, 2012 05:31. nuk@donga.com balgun@donga.com.

This year’s Korean stock market has seen many individual investors who bought theme stocks for short-term profit. Stock experts, however, say very few individual investors earn profit from such trades while most investors lose money.

This is because individual investors do not know when to sell when the price of almost all theme stocks fluctuates regardless of business performance, and certain major stockholders are guilty of moral hazard.

○ Investment in theme stocks leads to loss

Many individual investors jumping into theme stocks are well aware of the groundlessness of the stocks` profitability, but do it anyway believing they can be more nimble than others. The sluggish stock market this year is a major reason that has driven investors to theme stocks.

Kim Woo-joon, a director at Hana Daetoo Securities in Seoul, said, “Such investors purchase a large volume of theme stocks thinking they can get at least a small profit if only they could follow the stocks fast enough.”

Taking advantage of this greedy but naive thought, swindlers raise stock prices by spreading rumors and luring individual investors. When the prices are high enough thanks to individual investors, the crooks sell their stocks and disappear.

The spread of the Internet and social networking services has enabled con artists to rapidly spread rumors through a variety of channels. As a result, the time needed to purchase and sell has become significantly shortened.

Hwang Eui-cheon, a director at the Korea Exchange, said, “It used to take about six months for fraudsters to go from purchasing to realizing profits out of theme stocks, but now a week is more than enough.”

Against this backdrop, most individual investors are destined to lose money though a few earn profits. When the largest shareholder sells a large amount of stocks without prior notice, there is no way for small investors to sell before the stock price falls.

Stock prices for AGABANG & COMPANY, a welfare theme stock of the ruling Saenuri Party’s presidential runner Park Geun-hye, saw a losing streak from Feb. 17 to March 12 due by CEO Kim Uk selling 626,210 shares over three days from Feb. 17. In the losing period, the stock price fell 28.8 percent from 15,750 won (14.04 U.S. dollars) to 11,200 won (10 dollars).

The stocks of WOORIDULLIFESCIENCE, dubbed the theme stock of Moon Jae-in, the presidential candidate of the main opposition Democratic United Party, saw a price hike up to 4,380 won (3.90 dollars) per share. Yet the price fell to 2,055 won (1.83 dollars) from February to March 12 because of a selling streak of 2 million shares by company CEO Lee Sang-yeol, his families and his relatives.

○ Human network-related theme stocks

Theme stocks related to politicians have been popular this year and lured small investors by emphasizing human networks. Among the 131 theme stocks, 52.7 percent or 69 of them were human network-based stocks, 50 percent more than the 49 policy theme stocks.

Over the period of the last presidential election in 2007, policy-related stocks, including those of the four-river restoration project, were popular.

Experts say human network-related stocks have grown popular because determining presidential candidates took unusually longer this year. Many investors began looking for theme stocks early this year but could not find promising policies.

As a result, investors turned to human network-related stocks. Personal connections, however, barely reflect business performance compared to policies. Because of this reason, many went too far to make human network their theme stocks.

For example, the shares of Woo Sung Feed has been called a stock with the theme of Ahn Cheol-soo just because Rep. Shin Kyung-min of the main opposition party is Ahn`s friend while the family of Shin‘s wife is the biggest shareholder of the company.

KT Music became an Ahn theme stock because non-executive director Park Kyeong-cheol, director of Andong Shinsegae Hospital, is also a friend of Ahn.

Many theme stocks of Park Geun-hye emphasizes family relationships. EG has become a Park theme stock for having her younger brother Park Ji-man as its biggest shareholder. Dae Yu New Material is another since its chairman Park Young-woo is the husband of Park’s niece.

Sungan as well as Dongbu TS Black Pearl became Park theme stocks because the wife of Park’s younger brother is a non-executive director of those companies.

Among theme stocks of Moon Jae-in are client companies of a law firm where he was an employee, including Baruenson and PSMC.

A few fake theme stocks have been caught. Last year, an unknown person spread a picture of Moon and a man and insisted the man was the president of apparel company Daehyun. The company`s stock price went up after the rumors spread, but fell sharply after the real CEO of the company said he was not the man in the picture.