Last year, as you might remember, the market witnessed a huge correction during the March-April 2020 period, which was then followed by a sharp turnaround.
Almost every listed stock delivered significant returns as more retail participants flocked to the market, following the correction.
But the majority of these stocks do not deserve the price inflation!
Today, we are going to touch upon another pattern which investors (even you) might have fallen prey to while choosing stocks.
Retail investors usually have a mentality to choose familiar and talked-about companies without studying their actual fundamentals – they pick stocks of companies purely on speculative information circulating in the market.
These companies usually present a strong picture on paper, but the reality is far from it.
Today, we present you with 3 case studies that show exactly that.
Companies that have good technological expertise, exponential revenue growth, strong order books, and interesting prospects lined up, yet, due to factors like poor management practices, or muted growth in profit numbers, or increased debt and losses – their fundamentals are, in fact, very weak in comparison to their commanding stock prices.
Case Study – 1
Company: Siemens Ltd
Siemens is one of the leading providers of integrated solutions for industrial and manufacturing applications and solutions.
The company has strong backing from its German parent and good technological prowess in its field, but lately, it has been posting muted growth.
With profits of Siemens growing at a 5% CAGR over the last 5 years and ROEs below 10%, it has been delivering poor performance financially.
Yet, despite the weak growth, the stock has been telling a different story.
While revenues have been flat over the last 5 years, the stock is up a staggering 56% over this period!
With its current PE at over 80x, the price is moving away from its earnings at such a blazing and disastrous pace! In fact, the stock is priced like a growth stock but its financial numbers show a different picture altogether.
Hence, considering these factors, Samco Stock Ratings identified this divergence in the stock price compared to its fundamentals and has assigned it an appropriate rating.
Samco Stock Rating for Siemens: 0.5 star
Case study – 2
Company: Motherson Sumi Systems Ltd
Motherson Sumi is a well-known auto ancillary maker in India, which is backed by strong product offerings.
The company had grown smartly in the past on the back of increased demand, but now, the dream run seems to have hit a roadblock.
Motherson Sumi’s revenues have grown at 13% CAGR in 5-years but profits have not scaled that fast, growing at 5% CAGR over the same period. Even operating margins remained at around 5-10% over the past 5 years.
And even though the management had announced a 5-year growth plan in the past, the company hadn’t met its said guidance as it continues to report weak growth numbers.
Despite this, the stock price has been riding on the confidence given by the management, thereby delivering a return over 14% CAGR over 5 years, resulting in a valuation of 120x on TTM PE.
With such a huge disconnect between the stock price and actual growth, Samco Stock Rating gave it the lowest rating, reflecting its current reality.
Samco Stock Rating for Motherson Sumi Systems: 0.5 star
Case study – 3
Company: Mahindra Lifespace Developers Ltd
Mahindra Lifespace is a company that engages in the development of residential and other large-format real estates.
And as the real estate sector has been witnessing weak demand for a couple of years, the company has also struggled to post robust financials, being in the same sector.
Accordingly, the company of Mahindra Lifespace has been reporting a decline in profits, with the past 2 years seeing losses. With a slower real estate and construction market, the sales had seen a -11% CAGR in revenue over the last 5 years and had posted negative ROEs.
Yet, in 2020, when the real estate cycle started to gain momentum, this stock saw a gain of 170% in its stock price along with its peers, despite it posting consecutive operating losses.
A deteriorating financial profile and a rising stock price with no economic backing, make the stock an extremely weak candidate for investment.
Hence, due to the unjustified stock momentum, Samco Stock Rating gave it a low star rating.
Samco Stock Rating for Mahindra Lifespace Developers: 0.5 star
Though market sentiment for the stocks may color a different picture – one that is disconnected from its actual fundamentals – investors in the market must always practice due diligence before making any investment decision.
This is why we’ve brought Samco Stock Ratings. You can rest assured that 4000+ listed stocks are vetted and rated based on several financial parameters which will equip you to weigh the pros and cons of stock within minutes before considering it for investment.
From today, recognize only the quality stocks with Samco Stock Ratings.
“Ab sirf 5-star rated stops mein invest karo aur stock market mein #DhokaMatKhao.
Explore Samco Stock Ratings on the Samco app today!
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Great insight. Thank you very much
We’re glad that you liked it, thank you very much!