The truth behind most "multibagger" stocks:
A client read an article in one of the leading business newspapers:
"Stock XYZ rises from Rs. 15 to Rs. 515 in 4 months. Rs. 1 lac invested 4 months ago would be 34 lacs now!"
Immediately he calculated the returns. Its a staggering 3333% in 4 months!
He called me.
Client: Abhinit, why am I not getting such superb picks from you which can transform my life? Most of your recommendations have been working average, at best, in the last 6 months!
It took about an hour for me to find out what was going on in that company. Here is what happened:
1. The co was taken to the NCLT (court) by their bankers for non-payment of loans. (Basically the co went bankrupt).
2. The co. owed the lenders about Rs. 150 crores.
3. Three bidders submitted their proposals for buying the company's assets from the NCLT. The best bid was for Rs. 30 crores (Yes, that's a 80% reduction or hair-cut from what the lenders had demanded! The funny part is that out of this 30 crores, the new owners were allowed to raise 12 crores by selling the assets of company XYZ. This means the new owners essentially bought the company for Rs. 18 crores!)
4. The lenders approved the plan for selling co. XYZ to the highest bidder.
5. On 13th Dec 2021, the new shares of the company got listed on exchanges and started trading at Rs. 15.
6. Just imagine, the new owners of the co. got the stocks allotted to themselves at Rs. 10. On its way up to 515, they hardly sold any shares. The total traded volume was around 850 stocks. Average traded price between December and April was Rs. 100. This works out to a total turnover of Rs. 85,000.
7. Here comes the catch. The media article got my client's attention by showing 1 lac invested turned into 34 lacs. The truth is that it was impossible to get those many shares during this period because there were hardly any sellers.
8. Immediately after the media article got published, there were many buyers. On the very next day, around 11800 shares got traded at Rs. 500 per share
9. The promoters made a good 57.8 lacs for themselves. Needless to say, these profits were ripped off from the pockets of gullible investors.
10. From then to now, the stock is continuously falling and hitting lower circuit (no buyers) and is trading as Rs. 278 as I write.
1. Media articles can be heavily misleading. It is up to us how to interpret these articles.
2. Making quick money from NCLT/ bankrupt stocks is not easy. However, we have a framework for how to approach these companies. Of course, we cannot give you 3333% in 4 months, but yes, we can surely help you beat the markets in the long run.
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