I can tell you from the little I know about investments that being a contrarian investor is not everybody’s cup of tea. First, you need extraordinary conviction to buy a stock that other savvy investors are dumping. Second, you need nerves of steel to see the stock slump quarter after quarter even though its peers are surging to new highs. Third, you need the patience of a sage. Fourth, you are unsure about what you will take home at the end of the day for all the troubles that you are undergoing.
The most important attribute of successful contrarian investing is that you must buy at the ‘worst-case scenario’ stage. At that stage, most negatives are fully priced in and there is limited downside. But, if you get the timing wrong, you are in for trouble.
J&K Bank was the typical mid-cap bank. It was coasting along nicely, earning admiration and accolades from savvy investors.
Sanjoy Bhattacharyya, the veteran value investor, wrote a glowing tribute for the Bank and called it “incredibly attractive” and recommended a buy.
Parag Parikh, another veteran value investor and founder of PPFAS Mutual Fund, is known to be very strict about quality. He gave J&K Bank the green signal and entrusted the funds of his unit holders into the Bank’s stock.
While everything looked hunky-dory, the wizards at Kotak Securities smelt a rat in the books of J&K Bank. They suspected that the books were cooked up and recommended a “cautious outlook”.
Then, a local newspaper called ‘Greater Kashmir’ made the sensational revelation that J&K Bank had hidden several hundreds of crore of irrecoverable and sticky loans. While the Bank’s CEO, Mushtaq Ahmad, initially called the report “absurd” and “mischievous”, he knew the game was up and that heavy provisions would have to be made for the bad loans.
To compound the misery, the State of J&K witnessed tragic floods which led to heavy loss of lives and property. Whatever little was recoverable also became a bad debt. CRISL moved swiftly and downgraded the Bank’s fixed deposits to ‘FAA/Negative’.
Parag Parikh, in a move that looks sensible now, decided to cut his losses and exited the stock.
However, the confluence of adverse events plaguing J&K Bank aroused the contrarian instincts of Mohnish Pabrai. He swooped down and scooped up a massive chunk of 1,24,52,860 shares by laying down nearly 160 crore+.
Today, J&K Bank reported pathetic Q3FY15 results. The net profit slumped 67% YOY to Rs 105 crore, led by a significant increase in the provisions for bad assets. The provisions for bad assets increased 32% sequentially to Rs 220 crore against Rs 168 crore in the September quarter. The net interest income (NIM) also decreased over 1 per cent to Rs 639 crore, against Rs 647 crore in the same quarter last fiscal.
|J&K Bank Quarterly Results|
|(Rs cr)||Dec 2014||Dec 2013||YOY|
|Adjusted Net Profit||104.64||321.29||-67.43|
The bad results appeared to have caught investors unawares. There was a mad scramble to dump the stock and it went spiraling down a whopping 18%.
In hindsight, Mohnish Pabrai does not appear to have timed his purchase properly. Maybe, he ought to have waited for the quarterly results before making his move. Of course, the downside of that could have been that if the Govt. had announced a relief package for the Bank, the ‘pessimism’ would have turned to ‘optimism’ and Mohnish would have lost his chance to buy at a discount.
Now, the question is about the options available to Mohnish Pabrai. Throwing in the towel is obviously not an option. The second option is to keep a stiff upper lip and grin and bear it. The third option is to buy more and average the cost price in the hope that the tide will turn someday in the future. However, this option also requires nerves of steel because you never know how deep the rot within the Bank is. One may be throwing good money after bad.
Whatever option Mohnish chooses will give us an important lesson in contrarian value investing.