Do your own due diligence lest you end up buying a valueless stock

Many folks across continents love the markets and many hate the markets as if death is hacking them swiftly. I have often heard people saying such things like:

• The stock market drives me nuts.
• The stock market sucks and you bet it’s for suckers.
• The stock market is full of Harshad’s, Ketan’s and great swindlers
• The stock market is for those who love to lose their shirts
• The markets is only for the rich who get richer by the day by playing the volume game

I understand well the feelings and sentiments of those who hate the markets because they probably lost their hard earned money following tips and buying deadly stocks like Enron [ in US ] and say Soundcraft [ in India ] whose promoter Mr.Rajkumar Basantani shamelessly did insider trading rigging up the share price of Soundcraft and swindled the public. And yes theres a long long list of stocks which have simply vanished or delisted abruptly.

Rajkumar Basantani, had mobilised the money by offering high returns on fixed deposits. Most of the investors were from Mumbai and its vicinity. His companies – SoundCraft Industries and Kolar Biotech Ltd – were based in Mumbai. Investigators learnt that Basantani had deployed the funds in the stock market to increase the prices of the shares of his companies. They learnt that he had named drivers, peons and other sundry employees of his firm as directors of his companies. Subsequently both companies got delisted and Rajkumar went behind the bars. This is a good lesson for folks who are greedy for returns and go for Fixed Deposit schemes blindly – YOU SHOULD NEVER EVER INVEST IN FIXED DEPOSITS EXCEPT IN BLUE CHIP COMPANIES. YOU MAY GET 1 OR 2 PER CENT LESS BUT REST ASSURED YOU WILL RECEIVE BOTH INTEREST AND PRICIPAL AMOUNT WITHOUT ANY HITCH. Sorry for diverging from the main topic but I thought this may help me to alert folks who are sluggish in their investment matters.

Just as there are bad stories, there are a good number of good stories too. The following is a short true story told by a stock investor.

“About 12 years ago I invested in a stock of a micro cap company, Carnation Nutra-Analogue Foods Ltd. This company made a margarine product marketed as a healthy replacement for butter called Nutralite, and the 1 rupee face value share was trading between Rs. 1.10 and 1.30 after the company had declared a dividend of 60 paise. I bought at that time and post dividend my net cost was Rs. 0.70 for a share of par value of Re. 1. It was a thinly traded stock but its financials looked good and the buzz was that some larger company might buy it up and promote the essentially single product company.

Single product tiny companies either sink or swim fairly fast, so when the stock hit Rs. 13 in a few months, I sold out my holdings for a net gain of 18 times my investment. I could have sold out only enough stock to recover my original investment cost, but I was not comfortable holding a small unknown company's stock for the longer term. There were 2 other considerations--A thinly traded stock is by nature volatile and I did not believe that the financials at that time supported the increasingly exaggerated valuations. Second, it seemed that some message boarders on Moneycontrol.com were bidding up the stock among the boarders to possibly benefit themselves.

In 2006 Cadilla Healthcare bought a controlling interest in Nutra-Analogue Foods. In 2008 the company name changed to Zydus Wellness when it's stock was was trading at around 150, and today, 2 years later, it is trading at Rs. 600 and at a mind boggling price/earnings

(PE) ratio of 50. It still sells Nutralite very successfully along with other health products--SugarFree, a sweetner, and EverYuth skin care products. The stock that cost 70 paise 12 years ago has increased in value by over 850 times. “

Did I read over 850 per cent returns over a 12 year period. Wow, that’s not too bad and where do you get such returns. Not anywhere except in the Stock Markets provided you seek recommendations not from TIPSTERS but rather from professional Equity Research boutiques like HBJ Capital who will never recommend scrips like Soundcraft, Kolar Biotech.

Conclusion : There will always be good companies and bad companies but you need to exercise abundant caution and do your own due diligence before you take a call on any scrip - else seek the advise of experts who are extremely professional and ethical in their dealings.

Kishor S. Khot, [Kishor@hbjcapital.com], Equity Strategist, HBJ Capital Services Pvt Ltd