Why You Should Not Buy Stocks Like Zomato in this Market Crash

Jan 27, 2022

Why You Should Not Buy Stocks Like Zomato in this Market Crash

"Yeh market sab ka hain"?

That's the tag line of GROWW, an investing platform whose ads I see online all the time.

Honestly, these days the brand recall of GROWW and crypto currencies has become itched in my mind more than anything else.

In the good old days, Maruti would market its new car on TV or Katrina Kaif would entice you to have a drink of Slice.

But when GROWW says, 'Yeh market sab ka hain', I completely agree with them.

In fact, let me tell you - 'Yeh time retail ka hain'!

After all, retail power is standing tall against the huge FII selling over the past couple of months.

It's quite evident from the Rs 100-120 bn of flows every month through SIPs.

Let's say you started investing in the markets in 2020. For practical purposes, I'm taking June 2020 as the start date and not March 2020. I don't believe many would have bought during March 2020 at the market bottom.

Over the past 18 months, anything and everything went up.

In fact there was a joke on twitter. An investment advisor, after carefully analysing and studying stocks, made a 50% return in his portfolio over the past 18 months. His wife who was part of WhatsApp groups, doubled her money.

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To put it bluntly, Haathi, Ghoda aur Ghadah, all performed.

This was led by massive liquidity leading to FII inflows + DII buying + retail investor participation.

20% of all United States dollars in existence have been printed since 2020. Now we all know why central banks are called printing machines.

While 2020 and 2021 have been kind to us that is now in the past. Let's not waste time glorifying the returns we have earned.

Welcome to 2022 and let me get to the tricky part. The reality of 2022 and beyond is very different.

The era of easy money is over. Seeing the current band of valuation for the market and sectors, it's time to be very selective. Only a calibrated approach will help you make money.

The last one week was a nightmare for many traders and investors.

During the low point of the day when the Sensex crashed more than 1,700 points, 639 stocks listed on the BSE were on lower circuit out of 3,500 actively traded stocks.

FIIs sold US$1 bn worth in cash market on 25 January 2022.

In fact, FIIs are selling relentlessly every day over the past 7-8 trading days.

When was the last time during the past 18 months, you have read such alarming statistics? It tells us how brutal the fall has been over the week.

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Unlike many analysts neither do I make tall claims of Nifty targets in a year nor do I predict gloom or a crash. That is because I honestly don't know and I believe it is futile to waste time on it.

However there is a red flag which I have repeatedly spoken about over the past 6 months.

Let me revisit it...

There is a bubble in the loss making newly listed technology space and even a bigger bubble in the private equity start up space.

While the street was going ga-ga about the new age IPOs and talking about new valuation models, I explicitly wrote to you against investing in such loss making IPOs.

If you didn't get consumed by the hype around them, congratulations!

Now we have a more difficult question to address. After a 30-50% fall post-IPOs do they become value buys?

My answer is still no.

I have two reasons...

#1 The Theory Of Relativity

A product is available at Rs 100. Its price increases by 80% to Rs 180 in 4 months without any material change in it. Would you buy it?

Let's go a step further. After 20 days, the price goes up from Rs 180 to Rs 280.

So, in 5 months an item worth Rs 100 jumps to Rs 280 not because of a change in aesthetics or utility but just because more people are willing to buy it.

Would you rush to buy it?

The answer is a big NO.

Value Stocks: Stocks with Limited Downside but Good Upside Potential

The example above was of Zomato.

Even if Zomato halves from the peak, it's still 40% more expensive than what it was 5 months ago.

A fall of 50% looks good. But if you look at it holistically you are still paying 40% more without any material change in fundamentals.

Now I know, you would say the market moves based on liquidity.

I agree. But this is a time when everybody is talking about tapering and the end of free money era.

I'm sure you would be aware of what is happening in the Nasdaq and tech stocks.

The same is with many newly listed companies. They don't have a strong enough business to list at the valuations they did.

#2 The cash flows for these companies are back ended. This gives them a lower intrinsic value

There is a simple rule for the time value of money. The farther out the cash flows are, the lower their value is today.

It's as if one person had to give you money after 10 years and another person after 2 years.

You will value the money you will receive in 2 years more than the money you will receive after 10 years.

Most of these loss making new age tech companies will start reducing losses over a long time. They will make profits (hopefully) after 7-8 years.

Their intrinsic value will be much lower compared to today's profit making companies.

Also, as inflation starts to reduce your purchasing power, central banks all over the world will use their most popular tool to tame inflation, i.e. Interest Rates.

As interest rates (cost of capital) rises, their intrinsic value are reduced further.

To sum it up, the newly listed startups still need to fall by 20-30% even after the 40-50% correction we have already seen.

The margin of safety is still not completely favourable for investors in these stocks.

Better safe than sorry.

Warm regards,


Aditya Vora
Research Analyst, Hidden Treasure

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1 Responses to "Why You Should Not Buy Stocks Like Zomato in this Market Crash"

Janardan Mohanty

Jan 27, 2022

Great Article

Like (1)
  
Equitymaster requests your view! Post a comment on "Why You Should Not Buy Stocks Like Zomato in this Market Crash". Click here!