It was one of its kind, backed by savvy private equity investors and the seal of approval from Narayana Murthy, no less. But SKS has landed investors in a soup. Glamour stocks like SKS usually disappoint. Here’s why
SKS Microfinance was supposed to be one of its kind—the only listed stock which is into microfinance. It took the catchy management idea of selling to the "bottom of the pyramid" and made a business out of it. It was backed by savvy private equity investors and made an initial public offering (IPO), becoming only the second microfinance company in the world to get publicly listed. Investors felt good buying the stock because it was "doing good". That possibly explains why NR Narayana Murthy invested in the company.
SKS had all the ingredients of a glamour stock. It made a compelling "story", as brokers and fund managers love to say. SKS made an IPO at Rs985, got listed at Rs1,036, went up to Rs1,490 and is now at Rs670. From the peak made on 28th September, the stock is down by 55% in just one and half months. What happened to the glamour stock?
This is really not new. It's the same thing that happened to stocks like NDTV in India, or fashion stocks like Polo Ralph Lauren, Donna Karan International and theme restaurants like Planet Hollywood International in the US. They inflicted massive losses for investors. Glamour stocks dominated the dotcom boom and we know what happened to them.
The reason why glamour stocks do badly after listing is that the "story" seems so compelling that few people have the inclination to scrutinise the business model. SKS Microfinance's business model was always ethically wrong and economically weak. It has now been dealt a body blow to its fragile business model by the legislative changes in Andhra Pradesh. This legislative and political backlash should not have been a surprise, because the model of microfinance institutions (MFIs) is to borrow from banks, lend multiple loans to the same borrowers and apply strong-arm tactics to recover the loans. This wasn't apparent to those who were mesmerised by the SKS "model" of fast growth and high profits. Even if the model were not so bad, the stock would have disappointed. Why is this so? It's about the price. It's about how we deal with what is glamorous and expensive.
Here is a study done on our perception about expensive wines that James Montier refers to in his Value Investing. The subjects were given five wines to taste, and were asked to rate each of the wines. In the first version of the experiment subjects were told the price of each wine. When told the wine was cheap, people really marked the wine down, and when told a wine cost $90 they massively increased the ratings!
"Is it possible that something similar happens when people think about investing? It certainly seems plausible," says Montier. An academic paper examined the characteristics and performance of stocks rated as the most admired, or despised, in terms of their long-term investment value, in Fortune magazine's annual survey of companies between 1982 and 2006. "The despised stocks do significantly better than the admired stocks. This result holds even when returns are adjusted for markets, size, style and momentum!" writes Montier.
SKS's fall from grace was caused by two common drawbacks of investors-whether they are professional investors or retail investors. One, the blind spot caused by a company's glamour quotient which prevents them from probing and, two, a willingness to pay too much for the "story".