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Well Meaning But Useless Advice

Jun 20, 2014 | Dr C K Narayan | Fundamental Twist, Interesting Read | No Comments

One of the oft-repeated warnings, no doubt well meant, is that one should stay away from companies with questionable fundamentals. Rarely, if ever, though, does the person sounding this warning go ahead to define what those “questionable fundamentals” are. It is always easy to be wise after the fact. Everything is so clear in hindsight. One can turn right around and say I told you so! But what about saying so when it is happening? Or soon thereafter? Why is everything always after the fact?

For example, take matters about a year ago. Housing Development and Infrastructure (HDIL) tanked 23 percent in four consecutive sessions to touch a new 52-week low of Rs 49.30 back in 2013 after rating agency CARE downgraded the company’s Non Convertible Debentures to ‘default’. And even though the management has denied bankruptcy threats, investor concerns are not allayed. Analysts say the company is facing a severe cash crunch. Despite having transfer development rights, no new launches have been announced by the company. Delays in the MIAL (Mumbai International Airport Project) project too added to the woes.

More, promoter Sarang Wadhawan offloaded partial stake in the company. He sold 50 lakh shares of the company to raise Rs 57 crore to acquire a 15 acres land parcel. Questions were raised over the need for a stake sale to raise just Rs 57 crore when the market capitalisation of stood at approximately Rs 5000 crore! Citigroup and Credit Suisse too off-loaded major chunks of their shares probably because promoter selling stake in his company to fund land acquisition is unusual, unless the company is in a very difficult financial position.

And by August 2013, prices fall to an all-time low of Rs.26. One would think the above is sufficient evidence of “questionable fundamentals” right? So this is just the kind of stock that one should avoid, right? Look, even the big FII names are “avoiding “it! They sold, didn’t they? And rightly so, one would say- after all, who would hold on to this dummy in the face of a CARE report, junk status for their NCD, bankruptcy rumours, project delays………..etc.

Cut to now. Stock has risen to a high of Rs.114 by mid June! That is, stock has risen 3.5x from its lows in the matter of about 40 weeks! So what happened to those “questionable “ fundamentals now? On Cnbc website, they have a little sentiment meter that presumably collects views of people on the stock. As of 17th June, this sentiment meter reads 73% rating this stock a buy with only 20% for a sell! Who does one believe now? Was CARE and the FIIs who sold off out of sync or are the people making up this sentiment meter of 73%-buy the ones who are going to get hurt? Where is anyone stepping up to the plate right now and making views known? Interestingly, almost all thru the rise of the stock from the lows, I can find only technical buy reports on the stock until recently! Now what does that say, I wonder? Not far to see who is on the right side!!

I am not saying that fundamentals don’t get it right and that only technical do. Not at all. But providing half information is much more dangerous and traders and investors should be very wary of such “sounding- good” advice that is just plain useless. Unfortunately, there is a lot of it about.

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