This Penny Stock Turned Into a 400-Bagger and Crashed 50%... What Happens Now?

Jun 6, 2018

Tanushree Banerjee, Editor, The 5 Minute Wrapup

This is a journey that a penny stock made on its way to nearly becoming a midcap.

41,969% gains in decade.

2,159% gains in four years.

717% gains in twenty months.

Of course, stories of such meteoric rise of small caps are common in bull markets.

But this stock found mention in the list of the biggest multibaggers of the decade.

It could have made some Indian investors boast of the kind of gains that FANG stocks (Facebook, Amazon, Netflix, and Google) have handed to their western counterparts.

It could have found its promoters a place in the list of the wealthiest corporates.

And it could have made an ideal example of the power of compounding in investing text books.

If only the stock did not succumb to the force of gravity over last seven months.

Of course, the extent of correction so far (about 50%) is small compared to the gains in the past five years.

But it's enough to rock market sentiment and investor confidence in the stock.

Now the most important question... Are the fundamentals of the business also turning negative?

Well, the underlying business has undergone a huge positive transformation in the past ten years.

Right now, the market is ignoring that in the last ten years...

The company's revenues have multiplied 35 times.

Operating and net margins have multiplied 4 and 7 times respectively.

Return on equity has moved up from 5% to nearly 40%.

The company is way stronger to withstand challenges today than it was even a few years back.

It's true that FY18 was an exceptionally good year for the company. And the management has been candid about the fact that the performance may not be sustainable.

But short-term challenges can't dislodge the core strengths of the business.

Here are some facts...

The business has a strong moat due to a technical collaboration with the largest player in the world.

It has by far the largest market share in India.

It is the largest supplier of its products to the US.

Its products are cheaper than most competitors.

Its balance sheet too is stronger than any of its competitors and can withstand cyclical headwinds.

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The company's stock price ascent reminds me of the words of the legendary Howard Marks...

  • The desire for more, the fear of missing out, the tendency to compare against others, the influence of the crowd and the dream of the sure thing - these factors are near universal. Thus, they have a profound collective impact on most investors and most markets. The result is mistakes, and those mistakes are frequent, wide-spread, and reoccurring.

Marks talks about six emotions that undermine the investment process: fear, conformation to the view of the herd rather than resistance, dismissal of logic, greed, envy, and finally, ego.

Fear, Conformation, Dismissal of Logic, Greed, Envy and Finally Ego...


Is the management that owns over 40% of the business as worried about the movement of the stock price, as other investors?

Well, here was the closing remark that it made at a conference call with analysts, after the stock crashed...

  • It is not the company's core business to track share prices. It is only on the insistence of the analyst community and to put speculations to rest that we had this call. We would rather prefer to focus on the business than offer explanations for the stock price.

The next time you see a multibagger come down crashing, do try and understand the expectations the stock market has of these stocks.

Last Friday, I published a detailed report on this company, along with my view on the stock, for my premium ValuePro subscribers.

In case you don't have access to ValuePro, you can sign up here.

Chart of the Day

Indian investors are not unfamiliar with sharp market corrections. But a long bull market tends to erase the memories of the previous turmoil.

Of course, it is typically the small and midcap stocks that bear the maximum toll of a sharp market correction. They are the first ones to nosedive. But when markets are in a state of panic, fear feeds upon itself.

You must remember that during such times, even the stocks of some of the strongest business tend to succumb to weak sentiments. The crash of 2008 saw some of them correct by over 50%!

And there is no reason why this may not repeat in the coming market correction.

Can Bellwethers Correct by 50%?

But should you lose confidence during such periods of underperformance?

Here again, I go by the wise words of Howard Marks...

  • Every investor who's unwilling to throw in the towel on outperformance, and who chooses to deviate from the index in its pursuit, will have periods of significant underperformance. In fact, since many of the best investors stick most strongly to their approach-and since no approach will work all the time-the best investors can have some of the greatest periods of underperformance.

Warm regards,

Tanushree Banerjee
Tanushree Banerjee
Editor, The 5 Minute WrapUp

PS: For over 16 years, members of the exclusive Bombay Investing Society have received safe stock recommendations that generated double, even triple digit returns! This society is currently accepting new members. Click here to find out how you can join...

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1 Responses to "This Penny Stock Turned Into a 400-Bagger and Crashed 50%... What Happens Now?"

Anand

Jun 7, 2018

One of the best calls ever given by you , not from Price Recovery alone , BUT from instilling confidence to buy , when it was tumultuous all around. There was news of Sumeet Nagar having exited, other developments from China, etc etc but you still gave the call to your subscribers. Rare . May your tribe ( of recommendations) increase. Pun intended.

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