Title: The Impact of High Interest Rates on Penny Stocks and Groups of Shares
Introduction:
In the face of the ongoing downward cycle, high interest rates in Brazil continue to have a negative impact on the balance sheets of companies and the stock markets. However, it is important to note that these interest rates bring with them differentiated impacts. One significant consequence is the increase in the number of penny stocks, which are shares traded at less than R$ 1, as well as the formation of groups of shares. This article explores the implications of high interest rates on penny stocks and groups of shares, highlighting the current situation and potential risks for investors.
The Rise of Penny Stocks and Groups of Shares:
According to data collected by Economatica, the Brazilian Stock Exchange currently has nine penny stocks. In contrast, around March of this year, there were as many as 15 stocks trading for less than R$ 1. Furthermore, the number of groups of shares has reached 18, the highest level since 2016. This surge in penny stocks and groups of shares can be attributed to the prevailing high interest rates.
Impacts on Different Sectors:
Companies in certain sectors are particularly affected by rising interest rates. In 2023, retailers, construction companies, and growing companies have been the majority among the names forming groups of shares. These sectors are most impacted by the high levels of Selic, the Brazilian reference interest rate.
The Risk of Penny Stocks:
Many of the companies that have become penny stocks were or still are favorites of individual investors. However, investing in penny stocks comes with inherent risks. Typically, companies trading below R$ 1 face financial difficulties that could lead to bankruptcy. Investors should be cautious when considering these stocks as a buying opportunity solely based on their past value. There are underlying reasons for their significant devaluation. In some cases, these stocks have dropped by more than 90%.
Potential Liquidity Issues:
Companies in these situations often experience a decline in the liquidity of their shares. Due to their poor financial condition, large fund managers may stop supporting or marketing these stocks. Additionally, if a company carries out a reverse split, where every ten shares become one, the liquidity of these shares may be further affected. Many mutual funds tend to avoid penny stocks, making it challenging for some investors to exit their positions without suffering losses.
Specific Cases:
Taking Grupo Casas Bahía as an example, the company has seen a succession of negative results and is undergoing a restructuring process. On the other hand, Oi has gone through multiple legal recoveries and has been struggling for years to improve its financial situation. The fall in the stock prices of these companies reflects the challenges they face, signaling potential risks for investors.
Looking Ahead:
It is essential for investors in penny stocks to consider the underlying factors leading to a company’s devaluation. Investing solely based on the assumption that these stocks will regain their previous value may not be realistic. Instead, it is crucial to evaluate whether the projected scenarios from the past are coming true or are likely to come true in the future. Factors such as the company’s financial health, industry trends, and macroeconomic conditions should be taken into account.
Conclusion:
As high interest rates persist in the Brazilian market, the impact on penny stocks and groups of shares becomes increasingly evident. Investors should exercise caution when trading penny stocks, as companies trading at such low prices often face financial difficulties. Moreover, liquidity issues can further complicate investors’ exit strategies. Evaluating the long-term prospects of these stocks based on their underlying fundamentals is essential for making informed investment decisions.
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The high interest rates, which despite the beginning of the downward cycle are still present, in addition to having a negative impact on the balance sheets of companies and the stock markets, bring with them differentiated impacts: the increase in the number of calls penny stocksshares traded at less than R$ 1 and groups of shares.
According to Economatica data collected at the request of InfoMoneyThe Brazilian Stock Exchange currently has nine penny stocks, and at the peak of the year, around March, 15 stocks were trading for less than R$ 1.
The groups now number 18, the highest level since 2016 – when 69 companies made such a move -, when there are still three months left until the end of the year.
Among the names that have already carried out such a move in 2023 are companies like Marisa (LOVE3), Meliuz (CASH3) and Oi (OIBR3). Others, such as Grupo Casas Bahía ((asset=BHIAA3)), will probably have to carry out an operation of this type soon, since they operate below R$1.
Malek Zein, analyst at TC, explains that the groups are based on B3, which has a rule that suggests that the shares cannot be negotiated for a nominal value below R$ 1. In this case, a group must be carried out in the future. 30 days.
Between 2014 and 2016, Brazil went through the biggest recession in its history followed by an increase in interest rates, imposed to try to control inflation. Between 2021 and 2023 the rate hike cycle also occurred.
Companies in some sectors are greatly affected by rising interest rates. Now, in 2023, retailers, construction companies and growing companies were the majority when evaluating the names that made groups, precisely those most impacted by the Selic at high levels.
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Worry about penny stocks
Most of the names that became penny stocks They have also been or continue to be favorites of individual investors. Grupo Casas Bahía, Méliuz and Oi are probably the easiest examples to remember on this front.
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However, there are risks when positioning yourself in these companies.
“Typically, companies trading below $1 face financial difficulties that could lead to bankruptcy,” says Gabriel Duarte, an analyst at Ticker Research.
“Many investors think that this is a buying opportunity, since that company was worth more in the past, it should be worth the same in the future. The problem is that this is not always true. There are reasons that led these companies to devalue so much. In some cases, the drop is more than 90%. “Investors should be aware of these issues,” he adds.
In the case of Grupos Casas Bahía, for example, there is a succession of negative results and an attempt at restructuring. As for Oi, the company has already gone through several legal recoveries and has been struggling for years to try to get off the ground.
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“There is nothing ‘free’ on the market without a reason. That stock that fell from R$20 to R$0.80 did not become cheaper, but rather faced problems that could close its doors,” he explains.
It also points out that companies in these situations see the trading liquidity of their shares fall. Due to their poor situation, large fund managers, for example, stop marketing them.
“If the company carries out a reverse split in the proportion of 10 to 1, every ten shares that the shareholder had become one. As for the amount invested, nothing changes, but the liquidity of these shares may be affected, falling even further. Because they are penny stocks, many mutual funds don’t even look at them. Depending on the size of the investor, it will be difficult to exit without suffering losses,” says the Ticker specialist.
Diego Fausto, equity leader at Manchester Investimentos, also points out that some of the companies suffered from not achieving the scenarios projected in the past.
“There are many people who bought stocks in 2020, 2021, when interest rates were low and positive prospects were emerging. These people end up wondering if the stocks will be worth what they were already worth,” he says, recalling that many of the current stocks penny stocks They had drops of 80% or 90%.
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“I think it is an impossible question to answer, but the first question to ask is whether these scenarios, which were imagined back then, are coming true or will at some point come true in the way they were envisioned. If the answer is no, then, in fact, I think the answer is that these stocks will not return to the price they were at.”
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