We seem to be in a downward spiral in the context of Indian (and most of world markets for that matter) markets. Various sensex targets ranging from 12-14k have been projected and who knows might be achieved if things continue in the same vein in the absence of strong policy response from the govt and any change in the scenario in the world economy.
The question now is how best to utilise the circumstances to our advantage to maximise returns from this sharp market correction. The stocks that provide maximum returns on rebound are always the cyclicals which have been beaten down out of shape. And that I feel is a topic worth looking into.
The risk in investing in cyclicals is that one might bet too soon during the downmove and then get frustrated, seeing the stock bet on going down further from the buy price.
I think the trick lies in identifying companies which are going to survive the downturn/downmove and emerge stronger from the havoc as and when it ends.
Some attributes one should look for in such companies I feel are:
1). Company should have a very sound balance sheet preferably with low or no debt.
2). It should preferably be a market leader or no.2 in the sector it operates in.
3). It should be one of the lowest cost producers of the commodity/product it is engaged in.
4). Management integrity should be very sound.
5). High promoter holding and preferably no pledging.
6). Promoter buying from markets or company doing buybacks.
Obvious sectors that come to mind are infra sector, metals, plastics, polyfilms etc, real estate companies, companies punished out of proportion to its problems most commonly fccbs in the current market scenario, etc.
As and when the correction and the correction discussion progresses I would like to pitch in with my picks.
I think if one gets these rebound candidates right there could be 2-3 or 4 baggers within a very short time period. At least that is the observation I have made from looking at charts of various cyclicals/turnarounds during the previous corrections.
Comments/stock ideas most welcome.