When experts say that investing in mid-cap stocks is risky, most investors don’t pay attention. However, the recent horrible experiences where stock prices in Zylog, Arshiya International and Deccan Chronicle Holdings just crashed without warning should send a serious warning note.
Commercial Engineers and Body Builders Co (CEBBCO) joins the dubious list of midcap stocks that have crashed a massive 50%. On 29th January 2013, the CEBCCO stock was at Rs. 89. Today, 4th February 2013, it is at Rs. 47, after hitting the 20% lower circuit breaker on two consecutive occasions, meaning a loss of nearly 50% in just 4 trading sessions.
Gul Tekchandani just happened to be unlucky and this is no reflection on his stock picking abilities. On 31st October 2012, when he was prompted by the interviewer for his stock pick, he recommended CEBBCO. He said:
“Give me a stock idea where you are putting your money to work, where you are confident of a 15%-20% appreciation in next 12 months, next 18 months?
This should be taken as a disclosure as well; I have just about bought this Commercial Body Builders which is at about Rs 90. And I am always buying and selling the top line companies, but this is a new addition to the portfolio. I expect that this company will grow at 50% per annum and will give a smart returns, and does not require any money at least for a couple of years so that should help”.
Gul Tekchandani wasn’t alone in recommending CEBBCO as an investment grade stock. Emkay Global Financial Services gushed over it, promising a target price of Rs. 130. Other reputed names like SKP Securities, SPA Research and Sushil Finance expressed their bullishness over the CEBBCO stock. Also, some large investors like Fitworth Construction bought a massive 3.93 lakh shares of CEBBCO.
So what caused the CEBBCO stock to crash?
As usual, the management is tight-lipped and neither SEBI nor the stock exchanges are prompting them to come clean. In Zylog, the management at least attempted to give an explanation even though it was unconvincing. The management issued a clarification through the economic times claiming that everything was hunky dory and there was nothing wrong with the company. The crash was trigerred by one big investor named India Max Investment Fund Limited dumping 419,492 shares. India Max Fund had a total holding of 25.09 lakh shares and we don’t know how many more may get dumped in the days to come. Aditya Birla Finance also sold 3.25 lakh shares at Rs 48.2 a share and Prasant Desai (who had bought 10 lakh shares in October 2012 at about Rs 101 a share) dumped 7.33 lakh shares at an average price of Rs 48. The management’s explanation does not appear convincing. Big-ticket investors don’t just dump their entire holding at a huge loss unless something is seriously amiss. Meanwhile rumors are also rife that the pledged shares of the promoters (about 25,77,000 shares comprising 8.40% of the equity) have been sold by the lenders for non-payment of margin calls (which the management has denied). Other rumors are there has been a massive fraud and that the books have been fudged.
Anyway, whatever may be the reason, the important take-home message from the CEBBCO, Zylog and Deccan Chronicle stock crashes is that investors must have a strict stock allocation policy and scrupulously adhere to that. You must always ensure that your total allocation to any stock does not exceed 5% or 10% of your total portfolio. Also, there must always be a judicious mix of blue chip large cap stocks and the midcap stocks. Debt should also form a part of the portfolio. Sometimes, in our greed to get “multibaggers”, we tank up on midcap stocks, not realizing the lethal dangers we are playing with.