More than 300 stocks have fallen anywhere from 50% to as high as 90% from their one-year high prices
During the period from October 2017 to January 2018, a majority of the market participants chased the small and mid-cap stocks and many stocks in this space rose to unbelievable valuations. Now the focus of many domestic institutional investors is skewed highly in favour of select 10-15 large-cap stocks. The Sensex apparently returned to January 2018 peak level – but this was on account of just about 10 large-cap stocks, which added Rs 5.69 lakh crore of an incremental market cap to the overall BSE market cap since January 2018. If we exclude the market caps of these top 10 stocks, the remaining over 4,000 stocks listed on BSE have lost a whopping Rs 16.70 lakh crore since January!
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 they emerged as “multi-baggers” only in a retrospective in the last 52 weeks!
A technology company was trading at 10 folds in the last 52 weeks, but investors, who failed to suspect the reasons for the employee costs being just about 1-2% of total revenue lost 90% of the capital. Another internet company, which was trading at more than 10 times a few years back and two-and-half times last year, saw 60% fall from last 52-week high as it was actually a trading company, not a pure technology company. A dominant portion of its costs was on account of trading of goods and services, rather than on IT professionals.
Another software company remained as a solid multi-bagger in retrospective only and lost 60% of its peak price as it had spent 84% of its total capital on assets, which cannot be seen (intangible, mainly in the form of goodwill). Due to such huge spent on intangible assets, the overall return on capital employed was a mere 4%! Investors, who failed to see the danger of such skewed allocation to “invisible” fixed assets lost over 70% of their capital in the last two years.
A communication technology stock and a spirit stock were exactly trading at seven times their current prices about 11 months ago. While debt and other liabilities were more than two times the annual sales for the technology company, in the case of spirit company, the investors missed taking the initial caution of regulator seriously. In both cases, the investors, who invested at the peak prices lost 90% of the capital within a year.
A media stock was trading at 40 folds last year – it crashed 95% as it was earlier trading at around 100 PE without any track record of solid growth in revenues or profits. Some jewellery stocks crashed 85% to 95% within a year – many retail investors didn’t know the fact that it is very difficult to understand the balance sheets of cash-based businesses.
We will continue these case studies in the next week also.
The writer is founder and managing director, Equinomics Research and Advisory
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