Physical Address
Bengaluru, Karnataka
How Naivety and Greed Led to Significant Losses
Table of Contents
The world of stock investments is often marked by periods of euphoria and despair. One of the most recent episodes of euphoria surrounding Public Sector Undertaking (PSU) stocks has provided a valuable lesson for retail investors. It has illustrated how the blend of naivety and greed can lead to significant financial losses. In our monthly roundup for October 2024 we found that the market was still in the bullish range and most of the stocks looked overvalued.
Nobody cared for them for long
Until a few quarters ago, the only PSU stock that found favor with brokerage houses and TV experts was IRCTC. Known for its robust business model, IRCTC was one of the priciest stocks in the market. Brokerage houses crafted elaborate narratives about its potential, often teetering on the edge of implausibility. Meanwhile, high dividend-yielding PSU companies like NMDC, REC, PFC, SJVN, NTPC, IRCON International, and Coal India, which traded at very low PE multiples, were largely ignored.
For instance, the stocks of REC and PFC were trading at a PE multiple of 3 until the middle of 2022, with dividend yields around 13%. Similarly, SJVN traded at a PE multiple of 8 until mid-2021. Despite their attractive valuations and higher dividend yields, these stocks remained under the radar of most brokerage houses and TV experts.
PSU stock became multibagger
However, the scenario began to change dramatically. PSU stocks started outperforming the broader market, capturing the attention of brokerage houses that had previously overlooked them. Suddenly, every brokerage house started covering PSU stocks, often highlighting the ‘hidden value’ in these companies. Mutual funds launched new thematic funds centered around PSU companies, and brokerage houses issued BUY recommendations left and right.
The rally in PSU stocks caught the eye of TV experts, who quickly jumped on the bandwagon. These stocks were now a daily topic of discussion, even on holidays. Retail investors, eager to capitalize on this newfound enthusiasm, began flocking to these stocks in droves. However, they started buying when the PE multiples were no longer justifiable.
At the peak of the euphoria, SJVN was trading at a PE multiple of 60, and IRCON International at 34. The valuation ratios had reached absurd levels, and the dividend yields of PSU stocks had dropped drastically. Retail investors, driven by the fear of missing out (FOMO), continued to pour money into these stocks, ignoring the fundamental principles of investing.
One of the baits that was given to retail investors was the prospects of “Green Energy.” Companies like SJVN, which had no prior experience in setting up large solar parks, were pushed into investing in them. As SJVN had to borrow huge amounts to invest in these projects, the balance sheet looks poor.
They come in hordes
By the end of the December-2023 quarter, there were only 663,109 retail investors with nominal share capital up to Rs. 2 lakhs in PSU stocks. However, this number surged dramatically to 1,008,421 by the end of September-2024, as the wave of enthusiasm continued to swell. The Shareholding Pattern reported after December-2024 revealed that the number of such shareholders remained high at 1,007,990. These retail investors, initially drawn by the promise of substantial returns, are now finding it challenging to exit their positions as market conditions shift.
Another group of retail investors which caught our eyes are the ones who are categorized under HUF. The shareholding pattern for the quarter June-2022 shows no shareholding under the group HUF, but the number of HUFs in the shareholding pattern for September-2022 showed that 11,796 had got into REC. Still, there are 14,033 HUF investors who hold significant number of outstanding shares of REC.
This frenzy is a classic example of herd behavior, where investors follow the crowd rather than making independent, informed decisions. The sudden rise in stock prices created a bubble, and many retail investors bought into the hype without fully understanding the underlying value or risks associated with these stocks.
As the euphoria waned and the reality of overvalued stocks set in, the bubble began to burst. The stocks that were once the darlings of the market started to decline, leading to significant losses for those who had bought at inflated prices. Retail investors, who had hoped to make quick profits, found themselves holding onto depreciating assets.
The episode serves as a stark reminder of the importance of due diligence and rational investment decisions. It highlights the dangers of succumbing to market hype and the need for retail investors to be cautious and informed. Investing in stocks requires a thorough understanding of the company’s fundamentals, the market conditions, and the investment horizon.
Conclusion
In conclusion, the euphoria surrounding PSU stocks and the subsequent losses suffered by retail investors underscore a timeless investing lesson: the need for prudence, patience, and a clear-headed approach to stock market investments. While the allure of quick profits can be tempting, it is essential to remember that sustained success in the stock market is built on sound investment principles and disciplined decision-making.
References
- IRCON International page on screener.in
- SJVN page
- Shareholding Pattern of REC in BSE portal
[…] For detailed article on euphoria surrounding the PSE stocks can be read here. […]