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Did anyone predict that these stocks would be 'Multi-losers'?

Jun 23, 2015

In this issue:
» The brewing crisis in real estate stocks
» Indebted private sector holding back India's infra?
» Can telecom stocks offer better than FD returns?
» ...and more!


00:00
Sensex at 40,000 by 2020. At 4,20,000 by 2030. These are the kind of predictions that experts like to make and investors like to read. It is the gold rush for multi baggers that everyone's energy is focused on during good times. And why not? After all, information on company financials is relatively easy to access, most managements are now more willing to speak and investment tools are at one's finger tips. So the risk of losing money is of lesser importance than following the predictions on big gainers.

Unfortunately while the predictions on Sensex can and will come true over time, not every investor will make money. The index moving from 30,000 to 40,000 to 4,20,000 is not entirely subject to the fundamentals of its constituents moving in either direction. For that matter not just the Sensex but even the BSE Midcap and Smallcap indices will move higher over time. But only a fraction of their current constituents will sustain or move into the orbit of higher market capitalization.

Take the cases of stocks like DLF, Financial Technologies, Aban Offshore, MMTC, Lanco Infratech and Indiabulls Real Estate. These were not just the predicted multibaggers during the heydays of realty and infra boom. But the companies were the stars of the stock market rally until 2008. Hence should the fact that they have lost 90% of their market capitalization come as a surprise to you? Or that nobody predicted that these stocks would be multi losers should completely shake your confidence in stock investing?

Well, the saga of Satyam like stocks hardly ended in 2008. Ranbaxy, DLF, Suzlon Energy and scores of such companies that were the blue eyed boys of stock markets have destroyed billions in investor wealth over past 7 years. As per Mint, while there are 219 penny stocks today that have shed most of their market cap in the last few years, 469 stocks have doubled during the same period. Thus the balance is still skewed in favour of investors who do some diligent stock picking rather than speculating.

Rest assured tons of data and complex calculations alone cannot tell you which stocks are the safest bets. In fact it is rather difficult to predict the multi losers over the longer term than the multi baggers. And its requires a lot of reading on the part of investors to know which companies are more likely to destroy wealth rather than creating it. As Charlie Munger said "The wise investor should read extensively, analyze like a fox (as opposed to a hedgehog), and act decisively and in scale when the right opportunity presents itself." Thus knowing what stocks to not invest in is as valuable as knowing which ones to expect big returns from.

Ironically, the investment industry flourishes with complexity. The more layered or immediately gratifying the advice, the more valuable it is perceived to be. However, as an investor looking to not just create wealth in your portfolio but also protect it, you should not just seek out multibagger predictions but also multi-loser ones. Watch out this space for more....

Have you come across predictions of stocks losing a lot of value over time which proved correct? Let us know your comments or share your views in the Equitymaster Club.

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02:00
Talking about wealth destroying stocks, ones belonging to real estate sector feature on the top of our minds. We had spoken about heavily indebted companies like Unitech and Jaiprakash Associates in a recent edition of The 5 Minute Premium. The stocks had corrected by over 30% within weeks when investors became wary of their poor cash flow condition. And it now turns out that these companies are not even in a position to meet its operational expenses. Rest assured there are more such leveraged companies in the realty space and other sectors that are bound to destroy value by virtue of their debt obligations.

02:30
 Chart of the day
High debt levels are the cause of many a company's demise. But what happens when they are crucial for growth of an economy? This is the situation that India finds itself in. Large Indian infra firms are not able to quickly pay down their debt. Thus, they are in no position to make the huge investments needed to boost growth. The government too is unable to come to the rescue in a big way. This is because it has committed to bridging its fiscal deficit. If the private sector doesn't start the process of fixed asset creation, India's economy will languish. We have good reasons to remain skeptical.

India lags behind badly in infra investments
*PPP = Purchasing Power Parity; Source: Haver Analytics, IMF.

The chart shows just how far we have to go. If the Modi government is serious about bringing about a huge boom in infrastructure, it will have to find a solution to the debt woes of India's private sector. To achieve high levels of growth, fixed asset creation is a must. The scale of investments needed is a multiple of today's levels. Only a financially healthy private sector, along with strong support from the government, can achieve this we believe.

03:40
The telecom sector has not been an investor favorite for a while. High debt, intense competition, lack of pricing power, high spectrum costs and regulatory issues have all hampered the development of this sector. Then, there was the fallout of the 2G scam to deal with, as a large number of licences were cancelled and re-auctioned. Despite robust subscriber growth, the sector as a whole has been unable to earn a return higher than its cost of capital in recent times. Thus, it is surprising that FY15 has seen the highest ever FDI coming into the telecom sector. The first ten months (till 31 Jan 2015) has seen nearly US$ 17 bn flowing in! With 100% FDI allowed, service providers as well as tower firms are positioning themselves for the boom in data consumption. However, it is unlikely that investors will benefit from this frenzy. Even the leading telcos barely earn a return on invested capital (RoIC) higher that the prevailing fixed deposit rates. In the long run, investors will not be able to earn high returns in this sector we believe.

04:00
The Indian stock markets started the day on a muted note but remained in the green throughout the trading session. At the time of writing, the BSE-Sensex was trading higher by 90 points (+0.3%). The sectoral indices that led the gains mining and pharma.

04:50
 Today's investing mantra
"Over time, you get the reputation you deserve... I believe the same is true for companies." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee (Research Analyst).

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3 Responses to "Did anyone predict that these stocks would be 'Multi-losers'?"

Jagannath

Nov 6, 2015

Sir, help Stocks investment me Please
Thanks.

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Jagannath

Nov 6, 2015

Sir, help Stocks investment me Please
Thanks.

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vijay s

Jun 23, 2015

this space is one of the most read worthy of my daily dose of reading. Thanks Ms.Tanushree.

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