Every trend in the market is a passing one and none is permanent . So is
the current over dose of pessimism in small and mid cap value stocks in
India . That should be comforting for the sullen value investors who are
facing one of the most manic times in the recent past . Value investing has
been the least rewarding investing style in the last few months . More so ,
with the market’s obsession for the few narrow flavor-of-the-season stories (
notably FMCG and consumption) . Market is not just ignoring the rest of
the space , but beating it down with unjust punitive price action crushing
down “value” to “deep value” , if not to ultra-deep .
Few times have been as agonizing as this one for Value practitioners .
Market is depressingly partial for small-mid caps when it comes to its
response to quarterly earnings . Good score cards are met with an
uninspiring yawn while flat or average earnings are dealt with punishing
blow to their stock price . Contrasting that , there is irrational exuberance in
the market’s favorite stories ( FMCG / Consumption or so called
defensives) , where even poor earnings are rewarded with unjust rise
pushing up even further the already stretched valuations . Case in point is
market’s ever ebullient reaction to below average earnings of consumption
plays like Nestle , GSK consumer and Lever etc .
In such a punishing market , it is rather easy to hide behind such defensive
stories ( to manage short-term returns) , but an unlikely place to create longterm
value for the portfolio . The reasons are not difficult to fathom . Sanity
does return eventually when the storm runs out of the rain . The swift
adjustment that follows in the beaten down mid and small cap value stocks
creates stunning value to the portfolio , while timing of such turn is
unpredictable though. As history shows , investors who bet on timing the
turn always fall out as the adjustment is sudden and sharp with no hint of it
There is of course no instant gratification and the wait is going to be longer
and agonizing . It is a difficult phase of the market down cycle which the
value investors have to survive to come through, easier said though .
Keeping the skeptical investor flocks together in this phase will be a key
challenge and winning that crucial round will separate men from boys in the
value investing space .
Happy Value Investing !!!