The reality of ‘Too Big to Fail’ stocks

“All that glitters is not gold” - a simple aphorism that we have all heard of in our schools, yet it explains a lot about investing! Doesn’t it?

Time and again, we see quite a few stocks with a lot of buzz around them, media houses covering them in almost every debate, brokers giving their so-called “price targets,” and even after all these things, what is the result? Nothing!

Calendar 2020 was a rollercoaster ride for Dalal Street. From losing a considerable percentage of their portfolio in the lockdowns to experiencing a magnificent bull run, investors have experienced almost every aspect of the markets in just one year.  Sensex crashed 14 times by over 1000 points in 2020! Flabbergasting, isn’t it?

But then, Sensex went from a low of around 25000 points to somewhere about 52000 now; again, all this within one year, and investors couldn’t be happier!

Not every stock rides a bull run!

A common perception that comes to our minds is that everyone would have made money in the bull run. It’s natural to think so. If Sensex doubled within a year, it is pretty obvious to think that almost every stock would have given returns. Not every stock, but at least the ones that are the so-called Blue chip stocks?

Well, you will be astonished to know that many blue-chip stocks, which were thought to be great compounders, actually gave zero or negative returns to the investors this year!

Why do investors get deceived by such companies?

The reason is quite a simple one - we create biases in our mind, or we can say “Mental Heuristics”. Heuristics is basically a process by which people reach conclusions, through trial and error.

Let’s understand it with an example. There is a newly opened supermarket in your city whose stock is listed in the stock market. You notice that the supermarket is usually full and there is sometimes even a big queue outside it.

In the above example, what is the first thing that comes to your mind? Most people will assume that the store is doing good business and will buy the stock for the same reason. And this is what we call Mental Heuristics. Just by seeing a long queue outside the store, we automatically assume that it is doing well.

However, in reality, there could be umpteen reasons for the queue. Of course, there are chances that people actually like the store, but there can be unfavorable reasons as well. For example, the long line must have been there because people are returning goods as the store sells defective goods or the store’s service is very slow. But such reasons often go overlooked, and we just assume that everything is going perfectly without trying to understand the details.

The point behind discussing the above example was to bring light to the fact that what seems right is not always right. Talking about the stock market, we have seen many companies that have flashy stores are always in the news and at the targets of the brokers but still give no returns to the investors.

‘Too big to fail’, or are they?

Let’s look at some of the stocks which are perceived to be so big that they can’t fail, but well, sometimes they do!

• Tata Motors 

Wait. Did we just mention Tata motors - a Tata company? Yes, we did! It might be difficult for you to absorb this, but Tata motors gave a return of (-7.09)% over the last five years! But how did this happen? I mean, we all have seen Tata cars almost everywhere around us.

But then, what went wrong?

Well, there are a lot of reasons for this. Tata Motors lost around 61% of its share price in 2018. And then, in the 2020 market crash, the share price touched a low of around Rs 65 from around Rs 580 in 2015.  The reason?

The company’s Jaguar Land Rover has been a loss-making unit, due to which, in every quarter, Tata Motors faces a huge loss. Actually, the loss is primarily because of the JLR segment.  Mounting debt has also been a problem for the company. The company has seen a poor sales growth of (-1.76)% over the last five years, which has been concerning for the investors.

• Hero MotoCorp

And we all have seen a lot of hero bikes around us, right? Still, the company gave a negative return of 0.87% to its shareholders.

So, what went wrong?

One of the main reasons is poor sales growth which was around 1.70% over the last five years. This has been the main reason why the company saw negative growth in the stock price. The company also saw negative profit growth of (-1)% over the last five years. In auto stocks, these are important factors that investors look at while investing, and with poor growth in sales and profit, Hero has seen a poor growth in its stock prices too.

• Bank of Baroda

Bank of Baroda has given its investors a negative return of (-11)% over the last five years. But we all have seen many BOB branches in our cities, so why did the company give negative returns?

Where did it go wrong, you ask?

High NPA’s have been a major problem for the bank over the years. Bank of Baroda also has a low-interest coverage ratio. The stock saw a major setback in 2019 when it was merged with Dena and Vijaya Banks. The company also has a high cost-to-income ratio of around 50%.

The bottom line

It does not matter what we see or what we think, or how big or small the company is; the market only values the company that shows results. Many companies try to advertise a lot to lure investors, but it is not always possible to fool the investors in the long term. The real picture always manages to reveal itself. All these companies seemed to be “too big to fail” but the market showed them their real value.

“The greatest enemy of knowledge is not ignorance, it is the illusion of knowledge.” - this pretty much sums up what we are trying to convey through this article. Before investing, you should know about the company inside out. Don’t just see what others are trying to show you, try to build your own perception by thorough research.

Not everything that glitters is gold. Sometimes, it is just a typical metal with fake polishing. You just need to have the eye to see it!

Happy Investing!