Sensex @ 37,000. Why Are Your Stocks Still Down? - The 5 Minute WrapUp by Equitymaster
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Sensex @ 37,000. Why Are Your Stocks Still Down?

Jul 27, 2018

Kunal Thanvi, Research analyst

Yesterday, BSE Sensex touched the 37,000-mark for the first time.

Today, the Sensex is up 300 points as I write this. The 20% crash in the share price of Facebook in the US market has not hurt sentiment at all.

It's up around 9% return since January 2018.

However, the broader markets - the mid cap index and the small cap index are down 12% and 16% respectively.

This is a very different picture from what we've seen in last four years, especially 2017, when mid and small caps outperformed.

And this is the very reason most of your stocks are down. I understand that some stocks may be down as much as 50-60%.

Is it something you should worry about?

The answer is both a 'Yes' and a 'No'.

I mean if your portfolio still has bad quality stocks - even after the disappointment panda has visited you - then my answer is, Yes, you should worry.

But if you've already cleaned up your portfolio, and only now hold high quality businesses with top class managements, then my answer is, No, there's nothing to worry about.

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In fact, if you're in the second category, you should be very comfortable right now because you can buy more share in those same stocks. You can do this because prices are not in reflecting the strong underlying fundamentals.

You shouldn't don't doubt their quality just because they've fallen,. Rather, judge their quality by their fundamentals, both historical and present.

Earlier this week, I wrote to my Smart Money Secrets subscribers about a stock which is down 30% from my recommended price.

Interestingly, ever since we recommended this company in January 2018, the fundamentals have only improved!

The sales are up tremendously. In fact, the company has started initiatives which helped boost sales more than 3 times in one project.

I recently met the management again. It was great to hear them talk about these new initiatives as well as new launches the company is targeting next year.

I am quite excited and confident about this stock.

But with the uncertainty in the sector it operates and the correction in the market, it's fundamentals have gone unnoticed. The stock is down 30% from our recommended price. I strongly, believe this could be good time to add.

And it is not the only case.

We are seeing this across companies we track and meet. Stock prices have parted from improving fundamentals.

Are we at smart money secrets worried about this?

Our answer is a clear No.

We believe, this is the best time when we can meet good managements and recommended companies after the stocks have fallen to reasonable levels.

And we are not alone thinking this way. The Super Investors of India are doing the same thing.

Out of fourteen Smart Money Secrets recommendations... the promoters of three companies are increasing their stake after the fall in the stocks.

Even Super Investors are Facing the Heat

Also, I have seen many super investors increasing their stakes in many companies we have recommended.

Now we believe, the current volatility in mid and small caps, is here to stay for a while.

But we also believe, stock prices are moving away from improving fundamentals.

This will help us recommend, to our subscribers, good quality stocks at reasonable valuations.

To take advantage of this, I'm busy preparing for some of the annual general meetings I'll be attending starting next week.

These are the companies which generally don't meet analysts. The only way you can meet them is by attending annual general meetings.

I might find my next recommendation.

Stay Tuned and Happy Quality Investing!

Chart of the Day

As discussed above, the Indian share markets are behaving funny with a disconnect between BSE Sensex and the mid and small cap space.

In fact, within the Sensex, few stocks are holding on the markets... people call them 'HRITHIK stocks'.

These HRITHIK stocks are just like FAANG (Facebook, Amazon, Apple, Netflix, and Google) stocks in the US markets.

In fact, these tech stocks command around half of the total market capitalisation of US S&P 500.

The quality of the business and the growth they promise kind of makes them the best stocks to own in the world.

Many investors have argued about their high valuations. But unfortunately, nobody cares if the stock price only knows the north direction.

And the stock market analysts assume huge growth to justify the valuations. They build in assumptions of straight line growth. If it has grown at 20% in last 2 years, it will grow at the same rate for years to come!.

And when a business slowdowns a bit which is normal, these stocks get punished.

Take the recent example of Facebook Inc. It is one of the fastest growing companies in the world.

The stock had fallen a bit since it was caught in the Cambridge Analytica data breach.

What Does the Biggest Crash in This FAANG Stock Tell Us?

However, the recent slowdown in the growth made Facebook's shareholders life miserable.

The stock crashed and lost US $119 billion in one single day. This has become the largest one day fall on Wall Street.

One might wonder what were the reasons for such a dramatic fall. The answer is simple - the stock did not meet analyst's growth estimates and the management guided for slower growth going ahead.

The fall has even extended to some of the other FAANG stocks with Amazon down 3%.

Now, this may be an exaggeration and perhaps a good time to buy for those who missed it earlier. But what we learn from these kind of incidents is - always have a margin of safety in your investments.

We see same incidents happening in Indian markets as well. Recently, I wrote to you about why I rejected KRBL.

A strong business model and growth sometimes makes valuations of some stocks insane.

And if there is no margin of safety in the investments you make, it can lead to these kinds of drawdowns.

At Smart Money Secrets, we always try to find margin of safety in the stocks we recommend. In fact, this has led us to reject many good businesses that we would have recommended otherwise.

And we are happy to reject good businesses if there is no margin of safety because a great business may not necessarily be a great investment.

Food for thought - be careful while buying HRITHIK stocks.

Happy Margin of Safety Investing!

Regards,

Kunal Thanvi
Kunal Thanvi (Research Analyst)
Editor, Smart Money Secrets

PS: Kunal Thanvi is the Sherlock Holmes of investing. He is on a mission to reveal the top picks of India's best investors to you. For clean, high quality stocks that won't put your wealth in peril, subscribe to Kunal's Smart Money Secrets.

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