Why do stocks lose value?
Stocks are ignored, discounted, discarded, and put in the dust-bin by investors for a reason. The promoter might have cooked up books or committed inexcusable mistakes like Mr. Anil Ambani. The sales figures might have been inflated, as in the case of the old-time favorite like Manpasand Beverages. The demand for the company’s products might have shrunk suddenly. The outbreak of Carona virtually killed the entire entertainment industry in recent times. Brutal competition might have put the stock in a spot of bother. For example, the entry of Jio sealed the fate of many companies in the Telecom sector. The external environment might have changed. For example, rising crude prices might favor a group of stocks, whereas the oppositive might be true in respect of another group of stocks. At times, regulatory measures might come in the way, as it happens to ITC quite often due to increased taxes on cigarettes. Therefore, stocks can sink to unimaginable levels for multi-myriad reasons.
Shall we catch the falling knives?
When you see a good stock lose 20 or 30 percent value suddenly, the first instinctive reaction is to catch the falling knife. We tend to believe that an uptick in the stock price is imminent. We enter the stock, only to regret it later. It may dip by another 20 percent. You think the price is irresistibly low. You buy more. The stock falls by another 20 percent. You think the price has reached a mouthwatering level. It falls further. You go on averaging. By now the stock might have corrected 90 percent. Such instances are notorious in stock market history. You take the cases of Reliance Power, Reliance Capital, Yes Bank, Jump Networks, Manpasand Beverages, Vakrangee, and many more. These were, by no means, bad stocks at one point in time. But as we dig deep into the reasons for their collapse, you understand that they have been put in the dustbin for fairly valid reasons. One must understand that very rarely a good stock would fall with the ferocious speed with high volumes without valid reasons. Many a time, governance issues, bad capital allocation, the dubious practices of unethical promoters can turn a hot stock into a melting ice cube. The gullible investors realize this very late.
How to differentiate between the good from the bad?
The depressing narrative does not apply to every stock that loses its sheen and value suddenly. This is where successful stock-picking abilities matter. With a discerning eye, one is able to separate the wheat from the chaff. Vijay Kedia was able to spot Tejas Networks, to take a recent example, when the stock sank to INR 40 levels, due to depressed earnings for two/three consecutive quarters—falling from the IPO price of INR 250. With an EPS of 40, the stock of Globus Spirits was languishing at Rs 300 for a painfully long time. When stock prices sank to miserable levels, Tata Communications was available at a price of 250 (the time when the present MD, Chandra bought). The same was true in the case of Tata Tele Maharashtra which was a penny stock, now proudly showcasing its three-figure status, Stocks might get mispriced and remain undervalued for fairly long periods of time, till a discerning eye is able to spot their intrinsic value.
How to put the finger on stocks with deep value?
Is it possible to spot the winners ahead of the market? Not always. But it is possible. Scores of stocks haunt a discerning mind and quick images of those fallen stocks pass through the mental screen almost on a daily basis. A recent case in point is Jain Irrigation. Texas retirement fund bought the stock at 49, and it has fallen another 30 percent. Reliance Infra won the case against DMRC and is about to receive a sum three times more than its current Market Cap very soon. 3iInfotech after its recent restructuring exercise quotes at a depressingly low figure. Many real estate and construction companies need a closer look in this regard. (Karda already made news when a fund bought a huge quantity recently). The case of ITC needs a special mention here as value unlocking is going to happen once the Infotech division is demerged. NMDC also might witness value unlocking sooner than expected. Along with IDFC First Bank, many PSU banking stocks are also waiting for recognition from knowledgeable investors at this point in time. If not all, many such stocks might outshine their peers as investors pierce through the smokescreen and separate the winners from losers.
Good post @VSPRAOO , I too am of the opinion that beaten down stocks with good corporate management and execution skills can generate high returns . Of course only if we happen to catch the bottom . Many construction and infra companies have been getting their past dues with the help quick dispute settlement nowadays. One such stock Ive been following (invested) is HCC which had received arbitral award from NHAI and technically it looks like the bottom for this stock price (might be wrong) is reached . It has strong order book also . I have been following (not invested) Reliance Infra and reliance power also but they need to considerably reduce or do something about their debt to enjoy any rerating .
There might be many companies like this which are on the road to recovery and ignored by the market Maybe forum members can share their views on beaten down stocks which they are following in this thread .
Regards George
Beaten down stocks have a tendency to remain in the dustbin for a painfully long period. HCC, RelInfra, Rpower, Gayatri Projects, Suzlon, etc fall in this category. No one wants to own them, especially in a falling market. People tend to marry stocks that look promising, the ones that are talked about by analysts. Media hype is essential for any stock to zoom like it happened in the case of say TataTele, Tejas, Cosmo Films,Bajaj Healthcare, Orient Cement, etc. The fundamentals of beaten-down stocks do not change overnight. The turnaround story will unfold, slowly but steadily. If you are imbued with muscles of iron and nerves of steel, yes you may like the beaten ones. I must hasten to add, these stocks will put you on the edge and unless you have monumental patience, do not think of marrying these fallen angels.
Very true @VSPRAOO , I have one more thought process, instead of having anchoring bias to the price when the stock is beaten down and trying to catch the bottom one can always look at the support and resistance of those prices and volume activity at those levels to enter the scrip. Once the stock nears any level (preferably support level) one can take a position and if the price is not moving anywhere(according to your holding capacity) or has fallen some percent from support level one can always exit and enter again (above the support level) provided the story is still intact . One should not blindly put money and wait for the stock to go up , some amount of technical analysis is a must . So effectively only small profit percentage is lost when we enter above support rather then entering blindly and waiting for price movement to cross resistance levels and breakout . If we are sure that the fundamental part is going to change for the good then one can wait for the stock to show some activity by looking at technicals . This is my approach to these types of stocks and might not workout all the time . If other board members have any views to approach beaten down stocks please share your views.
I don’t know about the fundamentals of HFCL ltd but looking at the chart the stock has already runup from low of March2020 and is consolidating around 70 -80 range, maybe if some other positive fundamental trigger takes place the stock might breakout of that range, the exact reverse also can happen . Of course these are only my opinions and you should do your own analysis to build up conviction
to me it seems like the omnicron variant would be manageable without a lockdown
ofcourse the way the stock fell from 314 to 270ish levels , it felt like market is pricing in another lockdown
Another major reason for the recent fall was the recent indusind bank episode and that would have spooked bandhan bank investors too
Disclaimer : i am invested in bandhan bank, this is not investment advice and i am not a sebi registered investment advisor
Is any members following Firstsource Solutions ,not exactly a beaten down stock but compared to the rest of the IT industry it has dropped significantly eventhough it had posted decent results , does anyone know the reason for drop?
SHORT ANSWER: I pick out the best FA recommended stocks from many sources based on growth, PE, ROCE/ROE, Management, News etc. All the typical stuff that we discuss here.
Then, I try to list them out into a portfolio listing, and follow their charts.
With a lot of patience I wait for them to come down to support levels during any market selloff and pounce on them. Now, if they got to S1 support, Buy 1 occurs. If they move horizontally, Buy 2 occurs, and if they fall to S2, then Buy 3 occurs with more shares etc. This is my value based SIP technique that works for me since I am doing FA (somewhat) and for sure TA.
The idea being the title of this posting “Are beaten down stocks worth investing” > Answer is a conditional yes based on the above answer.
Hope this helps, and I am 100% relevant to the question and moderation will allow posting the answer.
One real estate Parsavnath Developers I guess need a special look as its consolidating between 20-25. It is repaying its debt and may be debt free soon. one of the leading developers in NCR… Once the Inventory overhang is over then it may get a special attention. Though its just my observation and reading, need a more deep dive into that .
Karda construction/KBC global Ltd
Update -
Mr Naresh Karda is in police custody recently for financial fraud and next day his elder brother committed suicide.
They recently raised around 700cr from selling bonds in one African country then promoters sold most of the shares.
