On This Day - 1 JUNE 2018
This is How You Can Avoid Investing in Stocks Like Manpasand Beverages
Last Thursday, I recommended a retail stock that I believe has 68% upside. Sarvajeet and I were tracking it for more than a year.
While we really liked the business, there were some grey areas that didn't give us comfort.
We investigated for more than a year, before we recommended the stock to Smart Money Secrets subscribers.
The stock has corrected about 25% this year.
In most of the cases, if you investigate a stock for one year - you could miss out on a sharp up move.
But we were lucky because the opposite happened. The stock went down and we could recommend it with a decent margin of safety.
Now I understand that next time...it could be different. A long investigation like this could mean that we miss out on a good opportunity.
But, let me be honest with you.
I will follow this course as editor of Smart Money Secrets.
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In cases, where I find grey areas, I'll keep hunting for more evidence, until I'm satisfied.
You see it's better to stay away from some stocks rather than be fooled by fancy claims of the management.
The last two-three years have been nothing less than a bubble in the Indian markets. Companies with shady managements, un-accounted balance sheets have seen their stock prices going up.
But thankfully, 2018 has taken some of these companies down by a thunder.
It started with PNB, Vakrangee and PC Jewelers.
Now the market has recognised the true worth of Manpasand Beverages.
Recently, the auditors of Manpasand Beverages resigned. The company had tried to fool them.
This is the auditor's resignation letter...
The Company Tried Fooling Its Auditors!
No wonder, the stock is making new lows, with lower circuits, since then.
Along with retail investors many super investors are not able to exit this falling knife.
Before buying this company, any investor could have done a basic investigation. He would have seen many red flags. (This gentleman did excellent work in raising these red flags)
Manpasand Beverages is a Baroda based company claiming it to be market leader in fruit drinks. It claimed that it is gaining market share from big brands like Frooti, Real, Slice, and Tropicana.
That was a big lie.
Investors should have investigated a few things...
- The distribution channels of the company (Frooti took 30 years to make such a robust distribution channel) as it claimed to have a strong reach in semi-urban states.
- Significantly low management salaries (Incentives did not align).
- Market share - Visits to few retail outlets in the areas Manpasand claims biggest market share would have revealed the truth (Less than 10% of retail outlets agreed with the management's claims).
- A related party 'Hansraj Agro' that was in a similar business.
Well, these are very basic questions that need to be asked while evaluating a company. It is now clear that most investors did not. Such investors fall victim to managements who fool shareholders by simply lying to their faces.
In this case, reported numbers (which are also questionable), made investors believe in the managements big claims. The same happened in case of Vakrangee too.
Like I said, a few super investors were also fooled.
This is precisely the reason we take our time (more than a year in the case of our last recommendation) to pick the best stocks for our subscribers.
Chart of the Day
Talking about doing a basic investigation before investing in a stock, it's interesting that some big investors and funds failed to do this in case of Manpasand Beverages.
They got carried away by the growth in sales and profits (which itself was questionable). In just a matter of few years, the company claimed to take market share away from big giants like Frooti, Slice, Maaza etc.
Ever since we launched Smart Money Secrets, we have been talking about how dangerous it is to blindly follow big/super investors.
These So-called Super Investors Got It Horribly Wrong!
As the chart shows, some big funds (Mutual funds and Private Equity Funds) had a big stake in the company as of March 2018.
Investors who blindly followed them are now trapped. They are not able to exit the stock as it is hitting lower circuits ever since the auditor resigned.
I am glad to inform you that this company would have never passed our Smart Money Score.
This is because...
- The management had been decreasing its stake - A big no-no for the Smart Money Score
- Management's salary was questionable (abnormally low) - A red flag in the Smart Money Score
- Questionable sources of growth - It was growing much faster than its industry
In investing, you will always make some mistakes. In fact, some of the best investing minds in the world will make mistakes. Thus, blindly following your super investors can be suicidal.
However, you can drastically limit them by following the right super investors and investing only if the stock passes your own check list.
Kunal Thanvi (Research Analyst)
Editor, Smart Money Secrets
PS: If you act today, you can get not only Kunal's latest stock recommendation, but also... instant access to 2 special guides (worth Rs 950 each) as well as all 12 open positions in Smart Money Secrets. But you must hurry! This is a limited period offer. Click here for the details...
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