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How A Storm Destroyed Rain Industries... And a Superb Small Cap Stock I Recommend

May 17, 2018

Richa Agarwal, Research analyst

Dolly Khanna...

Monish Pabrai...

Rakesh Jhunjhunwala...

If you have any interest in the stock markets, you know these names.

They are the demigods of Dalal Street. The financial celebrities...the market's white-bearded wizards.

The financial dailies love to track them and the stocks they invest in.

And they - for their part - love to talk about their favourite stocks (often after investing in them, of course).

Common investors hang onto every word of theirs and try to mimic their portfolios - in the hopes of mimicking their returns.

Most often, without digging deeper into the reasons why their demigods reached for it. Authority bias and fear of missing out (aka FOMO) take hold - and they must too.

This creates a virtuous cycle for the stock price (buying interest in the stock rises sending the stock price higher) in the short run. For a while, everyone feels validated. Then comes the storm comes...

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As it happened in case of Rain Industries.

Rain Industries - a favourite stock of the likes of Dolly Khanna and Monish Pabrai - recently saw a blood bath.

Post the results declaration, the stock price tanked.

Reason?

Another big investor, BNP Paribas Arbitrage Mutual Fund, dumped almost 19 lakh shares. (See how Mutual Funds are dramatically affecting small caps right now...)

Devoted fans are wondering what to do next.

It doesn't help that some of their favourite investors are choosing to maintain stony silence. It may be too late by the time they hear from them.

This is not just one-off example highlighting the perils of copy-cat investing.

If you blindly follow your favourite investors, you are unlikely to make gains.

Why so?

Because you will always get information (and act on it) with a lag.

The stock price would most likely be up by the time you hear about it and rush to buy it.

And huge gains would have been pocketed by the time you discover your favourite investor has exited.

You are quite likely to end up with the short end of the stick. At times, even losses.

Perils of Copy Cat Investing


If tracking superinvestors interests you, I believe you should follow Kunal's way.

I personally believe that the real money-making opportunities lie in stocks backed by great business fundamentals, which are not yet spotted by big investors and mutual funds.

Through Hidden Treasure, I aim to bring such opportunities to our subscribers before big investors get a whiff of them.

In investing, that's a real first mover advantage.

If you are wondering whether it works, know that the service has beaten benchmark indices by nearly three times since inception in February 2008.

But I have a confession to make.

Of late, I'm tracking what big investors and mutual funds are doing. I'm not interested in what they are buying.

I'm keeping an eye on stocks they may exit.

What has triggered my interest is an unexpected ruling by the market regulator for mutual funds.

As per industry experts, over 40% of mutual fund schemes are likely to readjust portfolios to comply with this new rule.

The churning could lead to an outflow of Rs 190 billion from small cap and large cap stocks to mid cap stocks.

This could open up a huge window to buy great small cap companies at attractive valuations. I'm keeping an eye on potential opportunities and will keep Hidden Treasure subscribers updated.

But today, what I want to speak of is a small cap recommendation I made this week.

This textile company is all about technology and reinvention.

Well before the Welspun India blowout that woke up clients and suppliers to the need to stick to ethics and quality, this company was doing the right thing even when no one was looking.

It was using technology to ensure credibility and transparency, that have become critical to sustainability of textile companies post Welspun India fiasco.

For businesses to survive and thrive, what matters more than the size is the right culture and values, along with business acumen.

And that's why the management quality becomes of supreme importance while selecting businesses you may want to invest in. This company ticks the right boxes in all these regards I believe.

If you haven't been paying attention to your small caps - now is the time to look up - as the opportunities start pouring in.

Regards,
Richa Agarwal
Richa Agarwal (Research Analyst)
Editor, Hidden Treasure

PS: A rare event in the investing arena is going to send the prices of some small cap stocks crashing down and make them available dirt-cheap to investors. Get your subscription now while the firesale lasts!

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6 Responses to "How A Storm Destroyed Rain Industries... And a Superb Small Cap Stock I Recommend"

R. Mohan

May 21, 2018

Each one has to do his own Home work.Not to get carried away by celbreity investor.

Like 

Mukesh shah

May 20, 2018

Good knowledge

Like 

Mukesh shah

May 20, 2018

Rain lndustries

Like 

SANKARAN VENKATARAMAN

May 19, 2018

What you said is absolutely correct. One should do one's own due diligence before investing. One should NOT invest because some celebrity investor invested. This holds equally good for the recommendations of Equitymaster or for that matter anybodyelse


7259811161

Like (1)

Jamshed

May 17, 2018

You are right that following choices of celebrity investors is not full proof.
But RAIN has a good product range and quality management.
I am afraid you have selected this script on a whim.
Which result are you talking about?
RAIN declined from 10/01/18 before the Y2017 result (28/02/18) which was good.
It ascended for a while but again price did not decline on 11/05/2018 on Q12018 results which were even good.
At 17/05/2018 CMP Rs.250/- it is fairly valued.
It should never have been purchased at Rs.400/- i.e. an over valuation and that is important. A good company should not be purchased on high valuations.
j.

Like (1)

Dinyar Eruch Edulji

May 17, 2018

Can you tell when this stock(Rain Industries) was recommended and is it still in the open. If not when was it closed. As I do not find the same in your open or close position.

Like (1)
  
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