Cera Sanitaryware touched its life time high of Rs 3918 in January 2018, post severe correction in small and mid cap stocks over last 15 months, stock is down by -28% and is at Rs. 2809 today. Even after such a correction in stock price, Cera Sanitaryware is a 18-Bagger stock giving as on date returns of 1690% in 7 years from our initial recommendation and 525% return from our reiterated buy at Rs. 450, which was not liked by our subscribers.

The story does not end here, there is a long way to go. Our suggested stocks is with a view-point of 1-3 years at least and not just 6-9 months. If fundamentals of the company are intact, we would not suggest our members to do profit booking or exit. Investors who stayed away just because of high price simply missed yet another opportunity. We continuously recommended Cera during last couple of years to our members at much higher levels.

There is a general misconception among the investors that high priced stocks can't generate multibagger returns. They often think that high-priced stocks are overvalued. In terms of valuation, a 50 rupees stock may not be cheaper than that of a 1000 rupees stock. There is no co-relation between the valuation and market price of a stock. To understand whether a company is small or large, you must look at market capital of the company and not at stock price. To judge valuation you must have to look at Price to earning ratio, Price to book ratio, Price to sales ratio etc.

Lets try to understand this with an example, Tide Water Oil share price was Rs. 1450 on 1st Jan'12 (stock split and bonus issue adjusted price, actual price was 5800). Today the stock price is at Rs. 5051 giving absolute returns of 248% i.e. 3.5 times in 7 years against double digit return of Sensex in the same period. We suggested Buy on Tide Water Oil and many of our subscribers might not have invested in it thinking that they can buy hardly 2 shares by investing Rs. 12,000 but now those 2 shares are actually 8 shares post stock split and issue of bonus share and share price is near the recommended price.

There are many examples like above by which we can illustrate that there’s nothing called high price. Multibagger returns is not dependent on the current market price of a stock, so don't be afraid of investing in high priced stock. You need to look at fundamentals like future growth prospects of the company, PE ratio, PB ratio, ROE, ROCE, debt on books, cash reserves along with other parameters to judge a stock whether it is undervalued or overvalued. We agree with you that judging valuation is not an easy task. So, take expert’s advise when ever required.

Another misconception among investors is to buy more no. of shares. They often think that its better to buy more no. of shares of a low price scrip (ranging below Rs. 10 or say below Rs. 50) instead of buying less no. of shares of high priced stocks. They often think that low price stocks can generate multibagger return quickly. During last 5 years, we have reviewed existing portfolio of our members under our Wealth-Builder (an offline portfolio management service) subscription, we have noticed that many of their portfolio is filled with such low-priced stocks and most of those are in great loss because of poor fundamentals. You may think that a two rupees stock can easily generate multibagger returns even if it touch to Rs. 5 or 6. At the same time don’t forget that the same can even come down to Rs. 0 levels which can evaporate all your investment giving you 100% loss! In terms of valuation a two thousand rupees stock may not be expensive than that of a two rupees stock.

Lets try to understand this also with a simple example, Lanco Infratech was a well-known company from Infrastructure sector. At the beginning of 2010 the stock was around Rs 55. Now it is hovering at just Rs 0.42 and trading is suspended in the stock. Those who purchased the stock during 2010 are in 99% loss! Rs. 1 lakh invested in Lanco Infratech in Jan 2010 is valued at merely Rs. 1,000 today, a complete wealth-destroyer! Isn't it? Those who bought this stock at levels of Rs. 30 and later again at Rs. 10 or Rs. 5 to average out thinking that stock has came down from all time highs of Rs. 85 are still waiting to get their buying price back. There are many such stocks like Suzlon Energy, GMR Infra, GVK Power and Infrastructure etc which have continuously destroyed wealth of investors over a period of last 6 to 9 years.

We do not state that all low price stocks are wealth-destroyers, it all depends on the fundamentals of the company. So, do ensure that you check out the fundamentals and valuations while investing in stocks instead of looking at stock price. Please get out of the misconception that low priced stocks will fly high faster giving you extra-ordinary returns. Always remember that stock price is just a barometer, actual valuations of a company can be determined by its fundamentals.

Regards, 

Since Jan 2018, broader markets i.e. Small Cap and Mid Cap indices are in bear phase. Over last few weeks, we have seen small & mid cap stocks getting butchered with fall in stock prices on almost daily basis. At current scenario, when Small & Mid Cap Index is down by 31% and 21% respectively from their peak made in January last year and significantly underperformed Sensex & Nifty, no body want to touch this space. Most of the liquidity in small & mid caps has dried up and found its way to large caps over last 16 months. At this juncture, large caps looks fairly valued or expensive in terms of valuations, however small & mid cap companies look attractive and can reward long term investors in big way. In fact, some of the worst times to get into the market turned out to be the best times for long term investors and same seems to be applicable now for small & mid caps.

Its always wise to be greedy when others are fearful. Fall in stock prices of small and mid cap companies by 40% to 60% from their peaks use to happen during panic times, if a particular company delivers 3x to 5x or even 10x type of returns on your investments in period of 3 to 7 years, it can easily fall by 40% to 60% or even more from its 52 week high during tough times which arises due to profit / loss booking, series of negative events / news flows and severe sell off due to panic across markets. Below are some of the major reasons of severe fall in stocks prices of small & mid cap stocks since beginning of 2018:

i) Rejig in Portfolio by Mutual Funds to meet guidelines defined by SEBI
ii) Introduction of Additional Surveillance Measures by SEBI to curb volatility
iii) Auditors exit from various companies on fear of stringent action from authorities
iv) Unfavourable macros with increasing crude oil prices and depreciating rupee
v) Trade war fears between US and China, rising interest rates, continuous selling by FIIs
vi) Panic in market due to IL&FS default on debt repayments
vii) Concerns in market due to severe sell off in large caps stocks like Zee, Tata Motors
viii) India’s economy registering lowest growth of 5.8% in the Q4 FY19 in last 5 years
ix) Contagion risk arising due to recent default of Rs 1,000 crore by DHFL
x) Ongoing NBFC sector crisis due to credit squeeze, over-leveraging, excessive concentration and massive mismatch between assets and liabilities.