A manufacturing company loses 42% after the market rumor of its proposed takeover fizzles out. There was no reason for the stock to move up close to 20% in a single day on the eve of market rumor as its annualized revenues are less than 1/4th of its outstanding debts. Across the world, many players were forced to shut down their plants as the industry is facing the worst business environment in the last two decades.
The recent Hindi movie 'Gabbar is Back' gives a great insight. The hero in the movie takes a dead body to a private hospital for "treatment" and the hospital tries to squeeze him for treating the dead person. However, the hero is so smart that finally he ends up getting a huge compensation from the hospital authorities after they admit their wrong business motive. Unfortunately, not all retail investors are that smart enough to identify "dead" or "near-dead" stocks.
A manufacturing company loses 42% after the market rumor of its proposed takeover fizzles out. There was no reason for the stock to move up close to 20% in a single day on the eve of market rumor as its annualized revenues are less than 1/4th of its outstanding debts. Across the world, many players were forced to shut down their plants as the industry is facing the worst business environment in the last two decades.
In the last few weeks, the small cap segment of the domestic equity market is going through unbelievable volatility. After 2000 dot com burst, we see once again major erosion in the marketcap of many technology companies silently. A small IT stock falls 34% within few weeks and 80% in 7 months – it is too tough even for a seasoned fund manager to understand its balance sheet concern. The negative trigger in this stock was its inability to repay the public deposits despite having quite low leverage and good amount of cash on its book.
Another technology company's stock falls roughly 50% in 7 months. Perusal of annual report of this supposed to be "people-based business" reveals that it's expenses on staff is so small as compared to "purchase of goods & services".
There were many more small IT and pharma stocks, which cracked about 40% in their market values as they were not able to sustain their "over-valuation". The unique feature of such stocks was that their revenue base was 1/10th or 1/20th of the their respective industry leaders' annual revenues, but they enjoyed as much as 100% premium in their stock valuation as compared to the leaders.
The need for the retail investors to understand the implications of leveraging, governance issues and unrealistic market rumors is much more important now. About 10 years ago there used to be considerable lag between the flow of information and trade execution for all investors. Today, thanks to the fast growth of technology platforms, for the most investors, both news flows and trade executions happen almost instantaneously. Hence, the punishments meted out to the stocks are enormous and go beyond what fundamentals deserve.
G.Chokkalingam, Founder & Managing Director Equinomics Research & Advisory Pvt. Ltd
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