Wockhardt Ltd: Valuation bubble burst



Wockhardt LogoMany investors and traders might have been curious to know what went wrong in the well know pharmaceutical company Wockhardt Ltd and why it's stock fell like nine pins in the past couple of months. 

The main reason for the fall is valuation bubble burst. Investors are paying the price of irrational exuberance as Wockhardt continue to crash from the peak of 2170 made in March this year. The stock has fallen 70% since then and has lost around 17000 crores of market value in 4 months . As on 24th July the stock closed at Rs.660 and has a market value of Rs.7244 crores.

Wockhardt Ltd stock price chart


The fall appears jaw dropping for a company of this size and pedigree but when looked relative to it's past 1 year performance, things might look a bit obvious. As can be seen from the monthly chart of Wockhardt above, the stock rallied from Rs 250 in Jan 2012 to Rs 2170 in March 2013 a steep rise of around 870 percent in 14 months. 

Low liquidity in floating stock and high expectations created a massive bubble of valuation which got punctured by USFDA issues related to it's plants.  The stock kept rising month after month from Sep 2012 to Mar 2013 on ultra low volumes which was concerning but analysts didn't paid heed and kept recommending this stock even at 2000. Now the stock is falling on huge volumes clearly suggesting capitulation and  portfolio based selling which could make the stock go down even lower from the current levels in coming months.

Moral of the story: Do not chase rally and feel left out. Price is what you pay and value is what you get. Always asses value you are getting for the price you are paying for a stock.



2 comments:

Sandeep BS said...

wow...few months back i was also tempted and felt bad for not investing in this stock...later i felt that i was late and hence backed out....good that i gig not get into it.

Amit Agarwal said...

The stock is hitting lower circuits and is down to 491 in last 4 days. As explained above the momentum on downside is very strong which could drift the stock even lower lower.

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