June 14 2021, on a Monday the news about freezing of accounts of non KYC compliant, unidentified foreign investors in Adani stocks crashed the whole set of them like dominoes. This was fueled by veteran journalist Sucheta Dalal doing a cryptic tweet about an old time operator pumping said shares. This caused our portfolios - Momentum, Balanced & Growth that had high allocation to these stocks go down as well. These portfolios were well diversified so we did not see a major crash but still the performance got affected.

In this post we talk about this scenario and how we handled it.

Why did we have exposure to Adani stocks?

We have exposure to the momentum factor in our multi factor tactical portfolios and obviously in our momentum portfolio. Momentum factor is about picking the stocks that are trending and no other group has trended more than the Adani stocks during the recent times.

If you were to ask about the most trending stocks at May end for sure Adani group stocks would top the list. Adani stocks have given massive returns in the last year, with highest 800% + in Adani Enterprises.

In a momentum portfolio you are chasing the trend so obviously Adani stocks will be a part of the portfolio.

What went wrong and the decision to sell.

It started with this tweet and the news report that 3 FPIs that held 90% + of Adani stocks in their portfolios had their accounts blocked by SEBI as they had not disclosed the beneficial owners. The two snippets of information combined cast a doubt on the credibility of Adani rally. The company said that the FPIs were not blocked and did not comment on wrongdoings by the investors.

We are a system driven advisor, so why did we intervene and sell the stock on 17th June? As a systematic investor the first rule we follow is to stay away from companies involved in any wrongdoing. This shadow of wrongdoing along with repeated lower circuits made us take a call for exit.

What is again unique about Adani stocks is that only around 3% of the holding of the company is with retail investors and domestic funds hold very little of them, so hardly any analyst even covers those stocks. Majority is held by promoters and then FIIs, the integrity of both of whom was questioned.

The Adani companies have massive operations and strong fundamentals so holding on to them was not too bad of an idea but given the lack of clarity and serious allegations we decided to sell.

Handling Selling and Lower Circuits

The stocks hit lower circuit for 5 days! We triggered a sale on Wednesday and only 1 in 5 people were able to exit. We got 100s of panicked calls from subscribers that they can’t exit. I wrote this note on how to exit stocks at lower circuits using after market orders and good till cancel orders. Our support channels as well as our nerves were overwhelmed!

Finally on Monday 21st June, the promoters started buying stock in the public market to provide support for the stocks. The stocks opened at lower circuit and closed at upper circuit. Majority of the investors finally found an exit, while some decided to wait for further recovery.

We are still handling updating all your smallcases with the manual sell orders. It takes a lot of manual handling to update manual orders out of the smallcase system and smallcase has received more than 4000 requests for the same across all managers!

Should we panic looking at the current market?

Markets go through various phases. There are times of slight corrections in the market but not all corrections are trend reversals. There are times where the trend reverses and there are times when the market just briefly consolidates. It is important to understand the difference between these two situations.

We get a lot of calls from people talking about inflated valuations, frothy markets & fear of a reversal. We believe that the market is strong for the long term and any brief pause that it might take is just a consolidation.

Was it right to sell? Outlook on Adani stocks

Adani stocks are still down and out and the answers to the question about the FPIs and the operator allegations are unanswered. There have been additional concerns for the stock like institutions pulling out investments because of their ties with Myanmar military.

This gives us the reassurance that the call to sell Adani stock was not a wrong move. We will wait for the story to evolve and like many investors will act with caution around Adani stocks till clarity comes. We will look to add these fundamentally strong stocks in the future if the model calls for it and the situation gets stable.

Talking about fundamentals, in a recent public statement, the company said Adani Ports & SEZ handled 247 million metric tonnes (MMT) of cargo, registering a compounded annual growth rate (CAGR) three times higher than the industry. "It has best in class EBITDA margin of 70 per cent and has registered volume CAGR of 10 per cent during the last five years," the statement said. For Adani Green Energy, the EBITDA margin is 89 per cent. Adani Transmission operates the largest private network in India. Adani Electricity Mumbai, a subsidiary of Adani Power, distributes power to over 3 million homes in Mumbai. Adani Total Gas, which has presence across 38 geographical areas, registered 41 per cent EBITDA. Adani Enterprises, which witnessed 10 times growth in share price in the last one year until early June, incubates new businesses such as airports, roads, data centres and solar manufacturing, besides enhancing its FMCG portfolio.

You can checkout all our portfolios here: https://wrightresearch.smallcase.com/

I did a Ask Me Anything session on the smallcase youtube channel last Sunday on 20th June right in the middle of the crash before the recovery. Please check out the video to see my thinking about the situation, right in the middle of it.