Why did I sell Wockhardt?

 

I had written about Wockhardt earlier and I had a position in this stock.

I sold my position in this stock on 23 May 2013 when it tanked 20% It was also the day the import alert was sounded by the FDA on drugs manufactured at their Aurangabad plant.

The selling decision in investing is as important as the buying decision. I am sharing a few thoughts on the reason for selling.

Update: Read about the warning letter issued to Wockhardt by the US FDA after you read this article.

What is the background to the Wockhardt import alert?

Recently Ranbaxy has been in the news for all the wrong reasons. They have had quality related issues at their plant and the US FDA has imposed severe strictures on them. There are allegations of criminal fraud by Ranbaxy.

You can read about that story through this fantastic article on Ranbaxy in Fortune.

Before the import alert on Wockhardt, the US FDA issued a Form 483 to Wockhardt. A Form 483 is issued if the US FDA finds something amiss after they have done a plant visit and inspection. They give time to the company to remedy the situation and reply back. The Wockhardt disclosure about this Form 483 on their website was not very descriptive.

I visited the US FDA website to see whether the Form 483 was uploaded there. But I realized that they disclose it only when someone asks for it to be disclosed under FOIA which is the equivalent of our RTI Act.

I still held on waiting for some clarity. Then there came reports from broking houses which said that 4-5% of revenues would be affected if I recall right.

I continued to hold.

Why did I sell Wockhardt on 23 May 2013?

The last straw was when it tanked 20% on 23 May 2013.

I sold it intra-day and avoided getting blocked by the lower circuit.

After a couple of hours news started filtering out that there was an import alert on one of their plants and that henceforth they could not use certain capacities to produce drugs headed for the US.

I sold before I heard this news.

You might ask why?

 

What was the outcome for my investment?

I was able to get out at a much better price than the stock has seen since then. It has only kept moving downwards. Today it has closed at around Rs. 1053.

In perspective the day before it tanked, 22 March 2013, it had closed at Rs. 1642.25. It closed at Rs. 1313.8 on 23 March 2013.

The outcome was good for me.

 

Was the decision to sell Wockhardt right?

It is useful to examine whether the decision was right. Outcomes can go whichever way.

One could easily say that it could have crashed due to some unknown reasons as is seen in some stocks. That it could have rebounded back. And that no import alert might have ever come.

Completely possible.

In which case, I would have sold out early and got lesser gain on this position.

I agree.

I have had some stocks in my portfolio fall and I have added more as they fell as serious value investors would do.

Here I did not.

In light of the facts, I guess I was justified in selling in light of the following,

  1. Ranbaxy decision
  2. Wockhardt Form 483

My thought process was,

  1. Since pharma is under a cloud (Ranbaxy decision) there will be severe negativity. People who don’t know the nature of the problem will take falling prices to be an indicator of a problem and will sell further.
  2. This is apart from the fact that Wockhardt already had a Form 483 issued to them by the US FDA.
  3. I am reminded of the Keynesian beauty contest about which I wrote earlier.
  4. I second-guessed and third-guessed (if that is a word) what others will be thinking.
  5. The only optimal option for me was to sell first, study later.
  6. If the company issued a clarification later I would re-examine the situation then and decide whether to buy or not.
  7. I would not mind the short term capital gains tax if applicable. I felt the risk of capital loss was more.

This was my thought process. I prefer working with more concrete information but here I had to make an exception.

 

Would I buy Wockhardt today?

Once bitten, twice shy?

Not really.

Even earlier in Indian pharma companies it has been seen that one problem uncovered usually leads to other unnoticed problems.

The cockroach theory. That if there is one there are probably more.

I am in no way insinuating anything against Wockhardt, but I feel it is prudent to see if there is anything more that awaits the company.

Watching a few quarters of results will not hurt.

 

What would you have done?

I would love to hear from you. Views / counter-views?

Have you faced similar situations where you have very sparse facts and yet have taken a decision?

Has it worked well for you?  Not?

Use the comments section below.

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Comments

  1. Anil Kumar Tulsiram says

    Fully agree with cockroach theory and for me it was a hard lesson. I dare to venture into falling knife situations like Deccan chronicle and CEBBCO. Though Deccan chronicle was pure speculation, CEBBCO was one which I was following for long time. Had [now I doubt their honesty], good management, decent business model and Tata group as PE investor, but again company completely mislead the market about family separation and I doubt son-in-law was kicked out for some massive fraud….

    Where negatives are already anticipated, I think it might [not sure] be fine to sell on declining prices, because generally retail investors like us get news quite late….

    • says

      Ok. I saw the fall in CEBBCO but I did not know the angle. Had not read up on it.

      The last thing that you mentioned irks me too. There was a case recently. I forgot which company did it. They gave material information to one analyst who wrote a report. Then, I think on the next day they gave disclosures to all the other analysts on the street. If this can happen with institutions, retail investors are last in line unfortunately.

  2. Prabhakar says

    I would like you to see Astral Poly & V-Guard Industries and sher your views on them. These two companies are growing consistently and strongly.

    • says

      I have looked at both actually. I am not sure I want to enter at these valuations. I agree with you that both are growing at a fast clip and are profitable with high return on equity. I will take your suggestion and do a post on them sometime in the future.

      You might have already done some study on these two. It would be interesting to hear your analysis. Do share it here.

    • says

      Some form of moving averages would I am sure. Certain technical analysis methods / indicators work for certain stocks. One has to understand what is to be applied for a particular stock. It’s a try and learn process. Plus, in some stocks, you might end up with frequent exits and entries.
      That then leads to taxation issues too where you could end up with short-term capital gains tax.

      I am happier if I have investments that grow well where I can avoid paying tax to the government under the long term capital gains tax rules.

      It’s investment / trading style dependent actually.

      Do you usually incorporate technical analysis methods? Which ones serve you well?

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