Thoughts on the recent market correction

In the last few months, stock prices have come down by 15-20% on average with some falling by 70-80% too. Our portfolios have also come down by 13-14% from their peak. 

There has especially been a lot of chatter about a meltdown in small cap and mid cap stock prices. Some well-known fund managers have even advised people to get ‘lock stock barrel’ out of small and mid cap companies. While I think their advice is well intentioned, there is more context to this than to simply clean out your portfolio. I thought this would be a good time to reach out to you with my thoughts on recent developments. 

Business media and websites tend to talk in very broad terms when they report on market events. And while they are not wrong in reporting that small and mid cap indices (-20%) have fallen far more than their large cap peers (-13%), it doesn’t really give investors / fund managers any actionable insights. 

First, let’s see how SEBI categorizes companies as Large, Mid and Small.

1.       Large Caps – 100 largest companies by market capitalization. 

Largest being 16.60 Lakh crores and smallest being 58,000 crores.

2.       Mid Caps – 101st till 250th largest companies

Largest being 1.75 Lakh crores and smallest being 17,000 crores.

3.       Small Caps – 251st to 500th largest companies

Largest being 46000 crores and smallest being 4200 crores.

4.       Micro Caps – 501st and below.

Largest being 22,000 crores and smallest being 1200 crores.

You will notice some discrepancies like the 101st company being larger than the 100th company. These categories get updated with a lag and there are some other criteria that also influence the categorization. But let’s move past those technicalities, they are not important.

The table is quite a revelation. Let us take an example of a company from our portfolio, Narayana Hrudalaya. This is a well-run hospital chain, been around for 3 decades and has a stellar track record. They make about 800 crores of post-tax profit and have a market capitalization of 25,000 crores. Now, most of us would agree that this is not a ‘small’ company, but it is considered a small cap by the market.

The only relevant question for us as investors is what this company is worth. How we make that assessment is more important than whether this company is a small cap or a mid cap. Being a small / mid / large cap will have no bearing on long term prospects of a company. 

This is not the first time prices have come down; we have had several such incidents in the last 5-10-25 years. We should stay focused on company fundamentals and not worry so much about falling stock prices. A drawdown is never fun to experience but it’s a feature of any normal equity market. 

We are not index investors nor do we invest based on the market cap of a company, hence it does not make sense for us to make decisions simply based on how a particular market cap category is doing.

At Duvera, I will continue to evaluate investments based on parameters listed below:

-              Company has a good track record of growing sales and profits

-              Clean management with vision for future growth

-              Return on Capital greater than 15-20%

-              Available at a reasonable price 

-              Hold for long periods of time as long as thesis remains true.

Once we do the above, we stand a good chance of making decent long term returns.

This is my 6th year of managing client portfolios and I would like to reiterate my gratitude to all of you for entrusting me with your money. Special thank you to my earliest investors who have been with me since 2019!

Regards,

Arpit