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The Equitymaster Research Digest

Have You Booked a Sharp Loss Recently?
May 19, 2017

  • The disaster that is Shilpi Cable Technologies
  • A few Hidden Treasure subscribers criticise Richa's consecutive 'Buy at lower level' recommendations
  • Should Profit Velocity subscribers worry about a 21% loss in Datamatics?
  • Madhu's take on the fall of Yes Bank's stock
  • Tanushree's special report on Glenmark Pharma
  • Avanti Feeds and Gruh Finance declare strong results...

Let's talk about losses.

Those sharp losses that come out of nowhere.

Here's a good example.

Imagine you bought shares in Shilpi Cable Technologies one month ago...and held on.

This is what has happened to the stock since then.

This Is What a Crash Looks Like

Not a happy situation.

But there's a lesson here.

Tanushree pointed it out in today's The 5 Minute WrapUp.

  • A stock isn't a lottery ticket with a price graph attached. It's a proportional share in the fortunes (good or bad) of a real business.

Indeed.

Shilpi Cable Technologies is not a good business.

Laying telecom cables is tough.

Competition is high. Nothing separates one company from another. There's no pricing power.

Working capital cycles are long. Cash flows are low compared to the reported profits.

The company burnt cash. And kept borrowing more.

When creditors demanded more collateral, the promoters pledged their stake - 73.51% of it.

Then came the day of reckoning.

A lender filed a bankruptcy petition. The CFO resigned.

All hell broke loose, and investors ran for the exit.

But there was a problem. They all wanted to sell at the same time.

That's only possible at a lower price.

A much lower price that will (hopefully) tempt buyers.

The result?

The stock has been locked in lower circuit limits for a month.

Shocking, no?

Here's something even more shocking.

Before the fall, this stock was up 3,863% in four years!

That's right.

Rs 10,000 invested four years ago would have grown to almost 4,00,000 by mid-April.

But today it's down to about Rs 94,000.

Now that's still up more than nine times.

But can anyone realise the gain? Can anyone exit and book profits?

Not with the 5% circuit limit being triggered every day.

By my calculations, at this rate, the shares will be worth Rs 10,000 in another 43 trading sessions.

That's incredible.

Just 66 trading sessions of losses can wipe out four years of extraordinary gains.

For more gory details of this saga, I recommend the premium edition of today's The 5 Minute WrapUp.

Richa not only explains what happened but also tells us why she would never recommend such a stock in Hidden Treasure.

Speaking of Hidden Treasure...

Some subscribers are unhappy she has recommended two 'Buy at lower level' stocks in a row.

This is understandable.

Humans tend to prefer action to inaction.

Especially when the actions of their friends and family in the stock market are making them rich...or so it would seem.

Allow me to quote Richa from the latest Hidden Treasure recommendation:

  • It is the liquidity, and not fundamentals, driving this rally. The small cap index is up 98% in last three years despite a 28% decline in earnings (of its constituents).

    We must remember, in a bull market, all stocks - good, bad, and ugly - can rise. Big gains in these times can induce a false sense of skill, making you complacent...or worse, tempting you to bet more and breach the margin of safety.

    As Warren Buffett says, 'Only when the tide goes out do you discover who's been swimming naked.'

    We, however, are not interested in discovering any nudes and are willing to wait for the right time and opportunity.

    Sometimes, the best investment idea is to buy nothing. That said, it is important to be aware of good businesses so you can act as and when the valuations are opportune. That's our aim with these 'buy at lower price' recommendations.

Richa will never compromise on margin of safety in Hidden Treasure recommendations.

By the way, Richa recently released a report about the top three Hidden Treasure stocks. It's called Junior Bluechips. You can get the report here.

On a less extreme note...

I had to recommend booking a 21% loss in Datamatics Global Services.

It was one of the first recommendations in the Profit Velocity service.

Subscribers will be aware that Profit Velocity is system-based approach to momentum investing.

The mission of Profit Velocity is to capitalise on the trend until a big reversal sets in.

There is no shame in booking this loss. I recommended the sell because the system told me to.

The way the service is structured, whenever the 20% stoploss is hit, we exit the stock, no questions asked.

Yes, the loss will hurt, but let's not miss the forest for the trees.

The Profit Velocity system is sound.

The February 24 recommendations are up 27% and 37% respectively...in less than three months.

Besides, nearly two-thirds of the total corpus is still in cash, ready to be deployed should some good opportunities come along.

Sticking to the theme of sharp losses...

Yes Bank is down about 15% in the last three weeks.

We all know why.

A recent RBI notification mandated banks to report diversions in their reported and audited NPA numbers (if more than 15%).

As Madhu explained very well in yesterday's The 5 Minute WrapUp, Yes Bank reported a gross bad loan ratio of 0.76% for FY16, much lower than the 5% as per the RBI audit.

Reportedly, other private sector banks also kept their bad loans under wraps.

Can you trust India's private banks?

The lack of transparency could go a long way in hurting the credibility and valuations of select private sector banks.

ResearchPro subscribers can read Madhu's note on this issue here.

What about Glenmark Pharma?

Another case of a sharp fall recently.

Glenmark Pharma is down about 25% in one week.

StockSelect subscribers were worried...and rightly so.

The December 2015 recommendation is down nearly 30% due to this sharp selloff.

But does that mean you should sell?

Tanushree released an urgent special report to alert subscribers what to do.

Read it before you panic.

Let me end on a positive note

Don't accuse me of being a pessimist - I have good news!

Remember Avanti Feeds?

It's the four-bagger in The India Letter service.

I wrote to you about it in Wednesday's Research Digest.

Avanti Feeds declared its 4QFY17 results. And they were excellent.

Revenues were up 50.8%.

Operating profits were up 170.1%.

Net profits were up 168.6%.

And a dividend of Rs 9 was the cherry on the cake.

Sarvajeet Bodas is the analyst who covers this stock.

He believes Avanti Feeds will aim for a higher share of value-added products going forward.

The stock is up 360% since the team recommended it on 18 February 2015.

Sarvajeet thinks it makes sense to hold on.

I agree.

And finally, a few words on Gruh Finance

After declaring a strong set of numbers for 4QFY17, the stock of Gruh Finance is trading near its life high.

Tanushree recommended it in The India Letter on 14 October 2014.

The stock has more than doubled since then.

Tanushree has revised the financial estimates for the business and updated the FY20 estimates.

Based on the price-to-earnings method the growth-oriented The India Letter service prefers (the PEG - price/earnings to growth ratio), the stock's target price has been revised higher.

You can read Tanushree's note here.

By the way, the latest The India Letter recommendation has been released.

In case you missed it, gain access to it here.

Something to look forward to...

Tanushree has informed me that, in the next Research Digest on Tuesday, she will cover growth stocks and how some growth stocks could turn into tomorrow's blue chips.

Stay tuned...

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