Kaha gaye woh log jo roj humme naye naye chakri aur kachra stocks dete the?
Today was a dreadful day for Dalal Street. The market crashed in such a savage manner that investors were walking around with a dazed look on their faces.
The Nifty Small-cap 100 Index plunged 2.77%. Several stocks in the Index hit the lower circuit.
The Nifty Mid-cap 100 Index fared slightly better by plunging only 1.13%. However, here also several stocks plunged to hit their lower circuits.
Basant Maheshwari had no sympathy for the investors who suffered the dreadful losses.
Instead, he blamed them for investing in alleged ‘chakri’ and ‘kachra’ stocks.
“Kaha gaye woh log jo roj humme naye naye chakri aur kachra stocks dete the?” he asked in stern tone, implying that we have been misled into buying all sorts of junkyard stocks for our portfolios.
Investing isn’t gymnastics where you can score a 10/10 but a faulty technique can break a lot of bones and put you out of action – completely. Kaha gaye woh log jo roj humme naye naye chakri aur kachra stocks dete the? ?
— Basant Maheshwari (@BMTheEquityDesk) June 3, 2018
Basant had issued the warning of “clear and present danger” against these stocks earlier also.
However, everyone ignored him.
Kachra, crap and chakri stocks are are like terminally ill cancer patients having multiple organ failure. Just because you are emotionally connected to your purchase price does not mean that you will get it back. And stocks are NOT family members. Yaha dawa kaam ayegi na Dua !
— Basant Maheshwari (@BMTheEquityDesk) March 6, 2018
Someone throws a name; the stock starts to dance; the public joins the party; once everyone’s bought, the music stops; there are no new buyers; the stock, devoid of fundamentals starts to fall; the protagonist disappears temporarily – then appears to throw another Chakri. REPEAT https://t.co/09l07iQfxE
— Basant Maheshwari (@BMTheEquityDesk) March 11, 2018
High Valuations + low earnings + dubious corporate governance = recipe for disaster
Shyam Sekhar conducted a systematic analysis of the reasons for the savage crash in small and mid-cap stocks.
He pointed out that investors have valued small and micro cap stocks at a higher P/E than that given to established stable businesses.
Such valuations are not sustainable unless if the company shows performance and very clear reliable corporate governance.
He warned that small and mid-cap stocks are seeing headwinds in terms of higher commodity prices, higher oil prices and also witnessing margin pressures due to higher cost of capital.
Further, the corporate governance standards of such companies have been overestimated.
This is shown by the fact that the auditors in three fancied small-cap companies abruptly resigned.
3rd listed co in a row where Auditors have resigned-Vakrangee, Manpasand & now Atlanta Ltd.
Underlines very little tolerance for even the slightest whiff of doubt. Take no risk-no chances approach! @BTVI @Geetu_Moza @stockgurupiyush @ShailDamania @SEBI_India @theicai @PwC_IN pic.twitter.com/00pnIBlf6W
— Siddharth Zarabi (@szarabi) May 30, 2018
— Shyam Sekhar (@shyamsek) May 28, 2018
Some large investors are still defiant about kachra stocks
Shyam Sekhar warned that some large investors are still defiant about the weaknesses in small and mid-cap companies.
“You have another set of large investors who still believe that based on their personal reputation, they would be able to sustain the valuation of these companies and find new followers to buy into them,” he said.
“The greater risk is in following other investors whatever be their reputation into companies,” he added in a grim tone.
He advised investors to make their own assessment of what the earnings headwinds are, what the governance related issues are and what should be a realistic valuation.
“That is the biggest need of the hour and we need to go through this phase. I do not see any escape from this space,” he said emphatically.
#MarketView | May have overestimated the corporate governance standards in midcaps; Must make own assessment on co's earnings, quality & not follow others, says Shyam Sekhar (@shyamsek) of iThought @nikunjdalmia @AyeshaFaridi1 pic.twitter.com/aJzXQ7DS8a
— ET NOW (@ETNOWlive) June 4, 2018
Two must-buy stocks
However, behind every crisis there is an opportunity.
Stock market crashes lead to even high-quality and fail-proof stocks being quoted at bargain-basement prices.
Shyam Sekhar recommended two companies which he said he has liked for a long time.
These are ITC and Bata India.
“These are two stocks which on any correction one should buy,” he said.
“One should buy these stocks at every fall and hold them for a very long period of time,” he repeated.
#MarketView | Must buy ITC, Bata on any correction; strong organised players in growing mkt, says Shyam Sekhar (@shyamsek) of iThought in conversation with @nikunjdalmia @AyeshaFaridi1 pic.twitter.com/IUr4uEJwKx
— ET NOW (@ETNOWlive) June 4, 2018
The investment rationale for recommending the two stocks was that they are strong organised players in a growing market.
“The market is growing slowly but surely. These two stocks have played out very well over the last 25 years and I do not see why they should not play out for long extended periods of time,” he emphasized.
It is obvious that we have paid a steep price owing to our obsession for multibagger gains. We have loaded onto several junkyard stocks in the misconception that they will make us rich overnight.
These junkyard stocks have turned out to be “multi-beggars” and have dragged us further into poverty.
Thankfully, we can still make amends by choosing the path of buying only “high-quality” stocks as advocated by Basant Maheshwari and Shyam Sekhar!