Abstract:
This study investigates ‘why do some investors prefer fundamentally weak stocks? The
study about this matter is imperative and exciting because there are plenty of models to
justify the investment in fundamentally strong stocks and at the same time those models
debar the choice of fundamentally weak stocks. But among the stocks quoted in the
Colombo Stock Exchange (CSE) fundamentally weak stocks outperformed the market
both in terms of liquidity as well as price boost.
In order to discover the reasons, data have been gathered from a sample of active
investors representing all categories of investors and analysed those using descriptive
statistical tools. The pertinent secondary data compassionate to the hints and trends
arising from the primary data gathered from the investors have used concurrently. A
sample of stocks representing majority of the sectors in the CSE, whose trading volumes
and number of transactions executed are among the highest in the market, were
selected to study.
The study finds that bulk of the investors consider fundamental variables of Net Asset
Value, Price/Earnings Ratio and Dividend Yield. They also muscularly use the pattern of
price movement for setting buying strategies. Majority of the investors are keen about
their required rate of return, but pays very poor attention for the stock’s beta factor.
Factors contain high degree of speculation such as trading on new information, react for
improved quarterly results and high dividend expectation elevates the madness of
investors to go after stocks. There is a strong correlation between the price of
fundamentally weak stocks and number of trades.
Investors desire fundamentally weak stocks because they are fundamentally weak. That
is, the value of the stock is coming from other factors such as higher number of trades,
availability of new information, improved quarterly results, high dividend expectations
and the degree of foreign buying. That is why the stock price movement cannot be
justified using fundamental approach. Moreover the low level of market values and the
abnormal capital gains too responsible for the fondness of these stocks in excess of the
fundamentally strong stocks.