Market on track for worst October since 2008. Should you catch the falling knife?
FPIs offloaded shares worth of over Rs 21,000 crore in October so far.
Back then, the flagship Sensex had cracked 23.89 per cent as compared to a fall of 7.38 per cent this month so far. In October 2009, the barometer had come off by 7.18 per cent.
Sounds tempting to move in? After all, quite a few stocks have crashed to their all-time lows or tested 52-week lows in the ongoing correction.
But hold your horses, caution experts. They advise against picking up a stock just because it’s at a 52-week low, for the simple reason that it can continue to hit newer lows going ahead.
Here, valuation is a key decider. According to analysts, one should go for a stock only if valuations look attractive compared to the overall state of the market.
Numbers tell you the story. The 30-share BSE index has hit its lowest level since April this year and the index has turned negative for the year. It touched an intra-day low of 33,553.18 today morning.
Catching the falling knife?
Nearly 60 per cent of stocks of the BSE 500 hit their 52-week lows in October whereas 32 of them were at their fresh all-time lows this month.
Aditya Birla Capital, Bandhan Bank, DB Corp, IL&FS Transportation, Infibeam Avenues, Max India, PNB Housing Finance, Narayana Hrudayalaya, Inox Wind, Bank of Maharashtra, Cochin Shipyard, InterGlobe Aviation, Reliance Power, Tejas Network and Vodafone Idea are some that plumbed new lows in October.
On the other hand, Dilip Buildcon, PC Jeweller, Dish TV, UltraTech Cement, Tata Communications, Canara Bank, Bharat Forge, Piramal Enterprises, Crisil, Bharat Financial Inclusion and DLF were among 294 stocks that tested new 52-week lows.
Stock picker Nikhil Kamath, co-founder, Zerodha, said, “Buying stocks around the 52-week lows is generally a bad strategy to follow as stocks are inherently affected by momentum. A stock at 52-week low is generally trending lower and the trend will most likely continue in the near future. It’s prudent to look at the size of the company. Smallcap and midcap stocks are best avoided near their 52-week lows.”
“Largecap stocks that form part of the Nifty 50 can be looked at. The factors to keep in mind here are debt on the books, outlook of the sector on the whole and in a lot of cases, it always comes down to the quality of the management. So, bear these factors in mind while picking stocks at 52-week lows,” he explained.
Of late, Indian equity markets have been battered by heavy foreign selloff as US economy started firing and bond yields there turned more attractive. Soaring crude oil prices, crisis in the NBFC sector and a falling rupee also hastened this selloff.
Foreign portfolio investors offloaded shares worth of over Rs 21,000 crore in October so far. This followed Rs 10,824 crore outflows in September.
“One can use stocks of 52-week lows as universe to select, but being part of this universe alone is not enough. Many of them may keep hitting fresh 52-week lows in the next 2 months,” said G Chokkalingam, founder, Equinomics Research and Advisory.
Chokkalingam shares some key variables an investor should look at before buying a stock. They are as follows.
1) Whether valuation multiples have been contracting below mean values for last 3-5 years.
2) Whether the company in question has relatively better balance sheets. It should be least leveraged and there shouldn’t be any stress from receivables and inventories.
3) It should be part of good management.
4) The company's business should be reassuring in terms of sustainable growth and it should not be on a down cycle.
As for the stocks trading at their 52-week low levels, Anand Rathi Financial Services is positive on Sunteck Realty and Persistent Systems with a target price of Rs 545 and Rs 820, respectively. Sunteck Realty hit 52-week low of Rs 295.70 on October 23 and Persistent Systems fell to 52-week low of Rs 540 on October 22.
Edelweiss maintained ‘Buy’ on InerGlobe Aviation, the owner of IndiGo, post Q2 results. However, it slashed the target price to Rs 1,073 from Rs 1,153 earlier. The scrip hit 52-week low of Rs 697 on October 9 on the BSE.
Global brokerage firm Credit Suisse recently maintained ‘Outperform’ rating on Adani Ports with a target price of Rs 480. The stock slumped to its 52-week low of Rs 294 on October 8.
About his approach towards the market, Shailesh R Bhan, Deputy CEO, Reliance Capital AM, told ETNow: “Our approach is simple. From a three-year point of view, we are studying which kinds of businesses have an earnings momentum, are directionally seeing an improving operating environment and how supportive the tailwinds are for those companies. That is our construct for investing. We continue to believe that the largecap space is still rational and over a three-year period provides a good opportunity.”
He added: “Over a period of time, people can look at other spaces as well, but at the moment given elections and the volatility, the largecap or multicap space is a better place to be in.”