The small-cap index has fallen nearly 20% while the mid-cap index is down 15% from their respective peak values seen in January 2018. However, more than 300 stocks have fallen anywhere from 50% to as high as 90% from their one-year high prices. Many small and mid-cap stocks, instead of becoming multi-baggers in future, actually emerged as "multi-baggers" only in a retrospective in the last 52 weeks!
There are over 200 stocks which were trading at two times to as high eight times at the peak of their respective prices in the last 52 weeks as compared to their current prices. In the process, they destroyed the wealth of the retail investors' equity wealth. What made these stocks to remain "multi-baggers" in retrospectives, rather than making them multi-baggers in future?
A small FMCG stock was trading at five times today's price in last January. While most FMCG stocks build up market caps quite steadily over the years with some fluctuations associated with the whole sector or individual performance, this one has shown frequent abnormal fluctuations in its market cap history. Some years back, the stock price moved up from poor single digit to more than Rs 1,000/ and later it fell over 80% within a year. Hence, investors need to know the history of market cap cycles before investing in any small cap stock.
A decent sugar stock has fallen nearly 80% from its last October peak price - it was a multi-bagger of five times in retrospective! Sugar sector is extremely cyclical in nature and hence, the stocks in this sector are known for tremendous wealth creation as well as for disastrous wealth destructions. Therefore, the investors need to buy the most efficient and relatively least leveraged sugar stocks at the bottom of the sugar cycles (when the industry is crippling on account of losses and arrears to the farmers) even if it means buying at higher PE. Those investors, who bought this particular stock after it jumped 40 folds from its three-year bottom, may have to wait for three-seven years to get back their invested cost or they may never get it back in full.
Last year, some of the infra stocks, which were referred to the NCLT were trading at more than four times the current prices. When the lenders were forced to sacrifice 50-70% of their lending, obviously it was expected that the stakeholders too would be compelled to make similar or more sacrifices. This was the case in the past as well. Those, who missed this logic and the history, ended up in steep erosion in their wealth.
A small company claimed to be selling chemical technology in Europe, which was an innovator of many high-end chemical technologies. This stock was trading at eight times the current market price only about 10 months ago – it lost 90% of its market cap as good stories not reflected in its latest revenue. Don't give an unbelievable valuation to unbelievable stories.
We will continue these case studies in forthcoming weeks.
The writer is founder and managing director, Equinomics Research and Advisory
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