Muthoot Finance & MCX Stock Crises Shows Why You Should Always Buy In Times Of Great Pessimism

Muthoot Finance’s (and that of its’ peer Manappuram Finance) World fell apart in March 2012 when the RBI imposed the restriction that the loan amount could not exceed 60% of the value of the gold. This curb was imposed with a view to discourage gold loans and the result was that business dried up because borrowers preferred to go to the unorganized sector. Also, the steep fall in the price of gold increased the risk of NPAs.

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The result was that the stock price plunged from a 52 week high of Rs. 231 in January 2013 to a 52 week low of Rs. 73 in August 2013.

I had my eye on Muthoot since its’ IPO. When the stock crashed I was debating it as a probable stock pick on the logic that (a) the business model was sound, (b) the demand for gold loans was temporarily affected and (c) the RBI would relax its stringent conditions sooner or later.

The third expectation came true on Wednesday when the RBI permitted gold loan companies to lend up to 75 per cent of the value of the gold jewellery pledged.

The result was that Muthoot Finance rocketed to hit the upper circuit of 20% on Thursday and followed it up with more hefty gains on Friday. In just 2 days, the stock is up 28%. Manappuram Finance is up 38% in the same period.

You can see the same thing play out in Multi Commodity Exchange of India (“MCX”). The stock was coasting about nicely when the National Spot Exchange (“NSEL”) crises hit in July 2013 and pulled the stock down from a 52 week high of Rs. 1453 to a 52 week low of Rs. 238.

Now, this is where the boys are separated from the men. While the boys were cowering in fright under their beds, the men kept their heads and coolly evaluated what the NSEL scam really meant to MCX.

If you would have logically thought about it, you would have realized that because MCX is an independent body, it was immune from collateral damage. Also, the regulator (Forward Markets Commission) had taken immediate steps to ensure that MCX does not siphon off funds by giving loans to NSEL or Financial Technologies.

Only one man had the courage and vision to make sense of the carnage. Prashant Jain of HDFC Mutual Fund rushed to the site of the carnage on 8th August 2013 and picked up a mammoth 3,06,000 shares of MCX at the throwaway price of Rs. 293 before anyone knew what was happening.

Soon thereafter, the Government started doing damage control and the stock surged to a high of Rs. 600 on 8.01.2014.

The result: Prashant Jain and the other brave hearts of MCX have taken home a gain of nearly 80% to 100%.

Anyway, now the point is whether there are any other stocks where pessimism can turn into optimism and we can make hefty gains? I have a few ideas:

(i) the first is SpiceJet which has been bludgeoned out of shape owing to the high fuel prices and Tata-Air Asia competition. However, a slight hint that a strategic partner is at the door (which is imminent) can send the stock spiraling up to the UC;

(ii) the second is the PSU Banks which have been battered owing to the hostile interest regime and the NPAs. However, these stocks have a high dividend yield of 8 to 9% (see GEPL’s report & HDFC Sec report) and so the downside is protected. When the sentiment changes and interest rates soften, these stocks will surge and make up for all the under-performance;

(iii) the third is MRPL which has been crushed owing to losses due to the delay in the refinery expansion. However, the refinery expansion is nearly complete and the increase in complexity means higher GRMs (see IIFL’s research report)

Can you think of any other stocks which are down owing to pessimism? Do share if you have any ideas!