Between March 2020 and February 2021, there was a flood of cash, with most central banks around the world cutting interest rates to record lows and implementing different steps to help economies recover from the pandemic.
Suddenly, there was a lot of free and cheap money accessible to the public and institutions, and in the lack of any other lucrative route for investment, equities witnessed a torrent of new inflows, triggering a worldwide market bull run. New all-time highs were set for major worldwide indices such as the Dow Jones, S&P 500, and NASDAQ.
As India gained international notice, a special allocation for Indian markets among emerging economies was formed for foreign institutional investors (FII). From April 2020 to October 2021, overall FII investments into Indian stock markets surpassed Rs 2.75 trillion (1 trillion = 1 lakh crore). On October 19, 2019, the Indian indexes reached new highs.
With the pandemic situation improving and economic activity resuming due to the removal of COVID limits, interest rate hikes and policy normalisation actions have occurred. The bull run in Indian and global equity markets has peaked, and the markets have begun to fall. The situation deteriorated further when Russia invaded Ukraine late in February.
As was the case with the indices that saw significant momentum during this era, many equities followed the course of the benchmarks. When the markets were surging, these equities witnessed exceptional appreciation, and when the markets began to decline after October 2021, they were among the greatest losers.
“The market’s position has shifted from growth and momentum to value, and equities that have been overpriced are experiencing mean reversion,” stated Divam Sharma, Co-founder of Green Portfolio. He feels that reallocation is taking place toward fundamentally strong management and sectors that have shown a good correction.
Here is a list of 20 stocks that were among the top gainers throughout the pandemic era but are now selling at a discount to their two-year highs.
So, what went wrong with these equities that caused their market price to plummet? Experts believe that these firms are either high-growth stocks with very high values, such as Brighthcom Group, KPIT Technologies, and Vaibhav Global, or have had some news effect their valuations and perception, such as Adani Total Gas Ltd, Adani Green Energy, and IRCTC. Aside from that, certain industries that benefited from the outbreak have lost favour as things have returned to normal. This featured various tech-enabled businesses, e-commerce / online shopping portals, and quick-service eateries (quick service restaurants).
“Any market corrections in highly valued stocks are met with extreme reactions, leading to big whipsaws, as seen in many such stocks,” said Sonam Srivastava, Founder, Wright Research. “For these high growths and overvalued stocks to regain their previous glory, we need the market to return to the euphoria of last year, where people could ignore valuation for growth or for the companies to deliver the projections of value with actual numbers.”
Tata Teleservices (Maharashtra) Limited, which appreciated by a never-before-seen 14,000 percent during the pandemic’s bull run, smashed all barriers and went into orbit. Once a forgotten narrative, the stock was trading near zero prior to the outbreak of the pandemic. The traders jumped on it like hot cake, hitting its upper circuit in 13 trading sessions at a go to reach its high of Rs 291.05.
Experts describe the stock’s spectacular ascent as “bizarre,” given that the company has been losing money for several years and its fundamentals are quite bad. They see no cause for the stock to skyrocket. However, after the turn of the tide, the stock has dropped the most – around 96 percent – from its peak of Rs 291.05. It has recovered slightly but is still down 55%.
Brightcom Group Limited is another stock that surged more than 7,800 percent during the epidemic, rising from Rs 1.55 in March 2020 to Rs 122.88 on December 24, 2021.
The price of Brightcom shares skyrocketed for a variety of reasons. It granted preferential shares to international portfolio investors in September 2021, driving up the price. This was followed by the issuance of warrants convertible into an equivalent number of shares to Shankar Sharma, First Global’s vice-chairman and joint managing director.
Another significant plus was that the company paid off all bank loans and became debt-free in 2021.
However, according to Mohit Nigam, Head – PMS, Hem Securities, the company has some challenges that affect the stock’s performance. “There is a very low promoter holding that is gradually decreasing, and there are various corporate governance issues with the company as Sebi has ordered a forensic audit of Brightcom Group to assess whether books were manipulated, financials were misrepresented, assets were impaired, and so on,” he explained.
Experts say the company still has a long way to go to command such high valuations, and the stock is on its way back, trading 48 percent below its December 2021 highs.
Solara Active Pharma is currently selling at Rs 446, having fallen more than 75% from its high of Rs 1,859.3 on May 19, 2021. “Fundamentals aren’t strong because the stock has a negative RoE (return on equity) and RoCE (return on capital employed), and sales growth isn’t obvious,” Nigam added.
However, there are equities on the above list that have a solid business plan, solid fundamentals, and a healthy financial situation. Their drop might be attributable to general market emotions as well as sectoral performance.
Based on the past two decades of data, the CNX SmallCap Index typically has a 25-30 percent drop after an 18-20 month exponential rally. “During the corrective phase, stocks with weak fundamentals and/or speculative interest tend to decline quite swiftly (even to the level of 60/70 percent),” said Gaurav Dua, Head of Capital Market Strategy at Sharekhan by BNP Paribas.
“This time it is no different and accordingly, investors need to reduce exposure to broader market and stocks with weak fundamentals as part of the portfolio strategy,” recommended Dua.Disclaimer: The views and investment tips of investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.