»5 Minute Wrap Up by Equitymaster

On This Day - 28 JUNE 2018
If Your Stocks Are Falling What Should You Do Now?

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Girish Shetty, Research analyst

The Sensex is close to its all-time highs. In fact, it's just 2.2% from its lifetime high made in January this year.

So is everything good? Why are people not happy?

Many investors have seen a fall of 20-30% in their portfolios.

Mainly because mid and small caps have taken a huge beating.

The mid-cap index and small-cap index are down by 14.2% and 18.7% respectively from their 52-week highs.

These were the fancied stocks of the 2017 bull run.

Why the difference between large caps and mid/small caps?

It is because the run up was spectacular. In 2017, the Sensex was up 28% while mid caps and small caps returned 47% and 58% respectively.

But what has caused this sudden correction in mid caps and small caps?

Apart from their steep valuations, corporate governance issues have dented investor's confidence.

Cases like Vakrangee, Manpasand Beverages, Shilpi Cables have cast a shadow of suspicion over the entire mid and small cap space.

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Corporate governance is an issue that you should never compromise on. A business will have its ups and downs.

But corporate governance problems will eventually bring the company down.

So what should you do?

First, take a good look at your portfolio. Are any of your stocks going through these issues? Or have they just fallen with the rest of the market?

In the first case, it's better to sell and move on rather than hope for a revival. Management with corporate governance issues seldom change their ways. Even if the current issue is resolved, rest assured, there'll be more coming your way in the future.

But if it's the latter...then the negative sentiment in the market can be a blessing in disguise. Corrections like this give you a good entry point into high-quality stocks.

Fortunately, that seems to be the case with the upcoming ValuePro recommendation.

I had recently written to you about how a meeting I had with the management of a pharma company.

Apart from a clean track record, its track record of execution gives me confidence. A new-generation has taken this family-owned business to greater heights. Everything they've done in the past has set them apart from the herd.

Such a dedicated focus on the business has ensured the highest gross margins for the company in its sector. The company ticks the right boxes in almost all the important criteria.

And the results have been impressive. See the Chart of the Day below.

The correction in the market has provided a good entry point.

In these times of increasing corporate governance issues mainly in small and mid caps, it's quality that matters.

Chart of the Day

In ValuePro, we look at stocks which you can buy and forget for the next 7 to 10 years.

These stocks should typically have a big margin of safety, be fundamentally sound, and can generate a 3-5x return over a 10-year period.

The recent correction in mid and small caps has presented such an opportunity. The stock has all the fundamentals in place that we need in a ValuePro stock.

A Company with an Impressive Track Record

Run by an able management, this company has an impressive track record.

With its recent entry into a new lucrative geography, we believe it has a long runway for growth ahead of it.

Regards,

Girish Shetty
Girish Shetty
Research Analyst, ValuePro

PS: For over 16 years, members of the exclusive Bombay Investing Society have received safe stock recommendations. These stocks went on to deliver double and triple digit returns with a success rate of 74%. The Bombay Investing Society is accepting new members. You can sign up right away here.

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