Analysts say investors will be better off investing in stocks which have sound fundamentals, stable business model, dynamic management, and growth.
Who wouldn’t like money doubling in a matter of months compared to years if kept in a fixed deposit? There is a saying which goes, rising tide takes everything higher. For Indian markets, the gush of liquidity has taken many stocks higher across market caps.
The rally was more pronounced in small and midcap space and penny stocks which saw many stocks doubling in a matter of months. A good sign for investors holding the stock but not a great sign if it is not backed by fundamentals.
There is another category of stocks which analysts advise investors’ to stay away from – Bhangaar Cap. This segment comprises of stocks which often have faulty business models.
“I prefer only midcap stocks. Percentage of largecap becoming a multibagger is less compared to midcaps. Also, midcaps rise faster. By the way, there is one more category which is ‘Bhangaar Cap’ which one needs to identify them and keep away,” Vijay Kedia, managing director at Kedia Securities told Moneycontrol.
There are many single digit stocks -- not all of them are Bhangaar cap, by any means -- which have more than doubled since the start of 2017. For simplicity, we have taken stocks which were quoting below Rs 20 and have now more than doubled.
Nearly 40 stocks more than doubled to give up to 500 percent return so far in the year 2017.
Stocks which rose include names like Padmalaya Tele which rose 496 percent, followed by C&C Construction which gained 318 percent, Magnum Ventures rallied 237 percent, and Toyam Industries was up 203 percent among others.
This is the list of penny stocks which have done really well. Please note: Moneycontrol does not in any way categorise them as 'Bhangaar stocks'. We are just flagging their strong performance.
But, are these stocks a smart buy at current levels? Not exactly, suggest experts. At best, these stocks could be a trading play and not an investment play. One strong reason which investors should factor in before making an investment bet in these companies is liquidity.
The trading volumes are very low in most of the penny stocks which at times become a curse for investors who want to exit from the stock or book profits.
Investors will be better off investing in stocks which have sound fundamentals, stable business model, dynamic management, and growth.
“Indeed such stocks are wealth destroyers and therefore they are called as Bhangaar stocks because eventually, they have to be sold off worthless. Getting the business going takes a lot of efforts, team work and right kind of model to create money,” Jimeet Modi, CEO, SAMCO Securities told Moneycontrol.
“Most stocks are not worthy of investments. The returns generated are enticing at the first instance, but on a deeper study, the majority are penny stocks that have a market cap less than Rs 50 to Rs 100 crore,” he said. There are some exceptions to this rule but that is very rare. Investors should in their best long term interest avoid such Bhangaar stocks.
For example, Modi quoted that Padmalya Tele recorded yearly revenues of just Rs 2 crore which command a market cap of Rs 12 cr. The stock has given 500 percent returns, similarly, C&C Construction has nearly wiped off its equity and free reserves but has a huge debt of Rs 2400 crore, the company commands a market cap of Rs 163 crore.
Many companies which are still under Rs 100 crore market cap are struggling and finding their feet. The returns that such company generates are nothing but a mirage, they are never realised, but remain on paper only, which eventually becomes worthless.
In the last two to three weeks, Sensex declined by 5 percent while S&P BSE Mid-cap & Small-cap were down by 7 percent from the all-time high to the recent low, thanks to valuations which are trading well above long term averages.
The valuations of some of the small and midcap stocks have exceeded that of long term averages; hence, any knee jerk reaction could cause more damage in the broader market, suggest experts.
“Mid-cap stocks have a tendency to outperform the benchmarked by multiple times. It's not surprising to see the 500 percent return. At this movement, it is not recommendable to have this stock in your portfolio as it’s already overbought,” Dyaneshwar Padwal – AVP – Technical Analysis, KIFS Trade Capital told Moneycontrol.“There are three basic things to be considered by every investor while trading in smallcap stocks - management of the company, market cap, and turnover,” he said.LIVE NOW... Video series on How to Double Your Monthly Income... where Rahul Shah, Ex-Swiss Investment Banker and one of India's leading experts on wealth building, reveals his secret strategies for the first time ever. Register here to watch it for FREE.