The Curious Case of WTL

The Technology sector for the PSX has 16 listed equities, a small number with considerable divergence in sub sectors based on the MSCI Global Industry Classification System, housing Telecom Servies, Media House, and Information Technology companies under the same sector. One of the household names from the sector is WTL which is a weird equity. Before stepping into why WTL is a weird equity lets take a summary look at the Technology sector.

Close Price & Outstanding Shares: Technology

Market Cap: Tech Sector

Size Distribution in Technology Sector

There are three equities that have more than a billion outstanding shares: PTC, WTL & HUMNL. Most of the stocks are in the low-price range with some in the mid-price bucket, while only SYS is the one with a close price in the highest percentiles. Something synonymous can be observed in the size distribution of the sector with most in the Mid-Cap category, a few in the Small-Cap category.

Where it gets interesting is the market capitalization of the technology sector. 2/3rd of the capitalization of the whole sector is concentrated in two stocks - SYS & TRG. The two equities fall in the middle in terms of outstanding shares. WTL, from a market capitalization perspective, is right in the middle, which is surprising. You would expect a big name like WTL to have a higher capitalization, but the market does not price it such. There are many reasons why the price of WTL is in the lowest percentile but that begs the question. why is the stock of WTL in such high demand?

Average Monthly Volume of Tech Sector

The graph on the left shows the average monthly volume of turnover of the total sector divided between WTL and every other stock. We can clearly see that relative to its market capitalization, and stock price, WTL has an outsized presence in the trades taking place. There is no other comparable stock that is even close to WTL in terms of trading volume.

Does WTL generate returns which is commensurate with the interest in it? It would make sense that the stock price makes WTL accessible to investors with limited capital but evaluating the returns of the sector we see nothing to warrant the interest in WTL.

13 of the 16 equities are down considerably in the last 12 months. In the last 3 months 12 of them are down indicating a prolonged bearish trend for the sector, which falls in line with the macroeconomic developments for Pakistan which have been dire.

While WTL is not worst performing of the lot, there has been considerable decrease in its value over the same time frame. We should also evaluate the Bid-Ask spread for similarly priced stocks and what we can clearly observe is that the volume generated by WTl is not remotely generated by other equities in similar price ranges.

We have ruled out this interest being due to returns - the whole point of investing, so what is it that is driving this interest. For this we have to look at breakdown of ownership of WTL. Capital Stake estimates that over 54% of the ownership for WTL is in local individual investors.

Returns for Tech Sector

Bid Ask Spread

The interest in WTL is down to behavioral irrationality and can be best explained by the 'possibility effect' from Prospect Theory. The effect states that people are more willing to bet on a low probability high value outcome than an lower value high probability outcome. The mean value for the latter might be higher but people place a higher preference on the former - the same effect comes into play in casinos and betting. As most local investors in Pakistan have limited capital they are betting on a low value stock making it big rather than develop a cohesive strategey that gives consistent returns.

Readers of this report should stay away from WTL for the time being because the company has failed to be operationally good for a long time. Its strategic advantage is limited- it only operates in two cities with a number of other competitors that operate across multiple cities. The company is not making losses but operational efficiency does not exist and the only times in the past 5-6 years that it has broken its prices barriers are when merger/acquistion talks have gained ground. At the moment the stock possess no characteristics that should make it an interesting investment either from a short term or long term perspective.