While I had written about Tata Motors in Quotational Loss = Buying Opportunity? on July 22, 2018 wherein I refrained from catching the “falling knife”, unless the company really starts building a franchise. Tata Motors was considered a fantastic franchise by one of the market veterans of during that time and offered excellent buying opportunity due to quotational loss, considering that the price had fallen by 37% since December 2017 to July 2018.
Last week’s results, wherein Tata Motors shocked the markets by declaring a staggering loss of INR 26,961 crores (~ USD 3.85 Billion) on account of asset impairment due to market, technological and regulatory headwinds. Since July 22, 2018 until today, the company’s market value has eroded by a significant 69%, partially contributed by a 17% fall on a single day on 8th Feb, 2019; the bloodbath continues!!
After all, a cone perfectly balanced on its apex will topple over if there is slightest defect in its symmetry; and even if there is no defect, the cone will topple in response to a “a very slight tremor, a breath of air”.
With the financials of Tata Motors already stressed and automobile and commercial vehicle purchase largely a discretionary spend-item,
the company was clearly resting on a fragile apex.
Now, where do we go from here?
First, have you booked the trade?
i.e. sold your existing investment on account of market cap erosion, provided you had invested in the stock already? This clearly means, as Howard Marks calls it: Capitulation is at play, i.e. overlooked the negatives or understated its significance for a while, and then eventually capitulated or sold in panic on the downside. 17% stock price fall on Friday, February 8, 2019 surely accentuated this behaviour.
Second, has the price fallen enough?
The answer is simple: I don’t know. One thing is mathematically certain though. In order to get to the same valuation of July 22, 2018, the company’s stock price needs to rise by 222% from here on. In order to make up for the Friday’s (February 8, 2019) loss of 17%, the stock price needs to rise by 20.5%. Going up is always very difficult, both in life as well as with stocks.
Third, a better framework to have is: Is the problem / behaviour fixable?
If not, sell the stock immediately. If, however, the answer to this question is in the affirmative, then it makes sense to invest in the company. Only 2 questions then need to be answered (more of this framework at Market mayhem+Investing Framework!!
1. Is the price low enough? Difficult to answer!!
2. How long will it take for the problem/behaviour to recover? This will take a long time, considering that the company must ward off competition both on the domestic front but also internationally, wherein the automotive industry is facing technological, regulatory and market headwinds. Despite intense focus to revive the business, somethings just take time. After all, as Warren Buffett had said, “You can’t produce a baby in one month by getting nine women pregnant.”
Disclaimer: Please note that these are my personal views. While, I am NOT a registered Research Analyst as per SEBI (Research Analyst) Regulations, 2014, all investors are advised to conduct their own independent research into individual stocks or industries before making any decision. In addition, investors are advised that past stock performance is not indicative of future price action.