AS THE MARKET ZOOMS, KEEP FEET FIRMLY ON THE GROUND!

By Ruma Dubey

Take a look at the stocks which have hit their life time highs today – APL Apollo, Andhra Sugar, Bengal Assam, Dukes Offshore, Dwarkesh Sugar, Everest Kanto, Florence Investec ( part of Singhania group), Indus Ind Bank, India Bulls Housing, Kotak Nifty, KRBL, L&T Finance and many more.

And the list of companies dominating the new lows are majority all penny stocks with suspicious corporate governance issues.

So we should actually thank this market today and more to come in the days ahead – at least the chaff is getting separated from the grain.

One need not be a stock market specialist to say that bulls have a the markets in a tight grip. Moods remain cautiously optimistic and despite many stocks having surpassed their valuations, many are on the prowl, looking for bargains. Call them scavengers or whatever, they buy every time there is a carnage; they scavenge through the rubble, looking for a good bargain.  When stocks hit new 52-week lows or life time new lows, many rush in to accumulate the stocks. And their trading strategy could not have been more perfect; after all this is precisely the mantra of Warren Buffett – buy when all are selling and sell when all are buying.

That does make a lot of investment sense but the question is – when to buy? You may have bought a large chunk of shares after it had hit a new low, having the patience to sit on it for some years till moods and markets improve. But what do you do when the stock continues to fall, hitting new life time lows? It is good to catch a falling knife but how do you ensure that you do not get hurt?

A few points to keep in mind when you catch such sharp falling knives:

• Buy only into sound companies, with no corporate governance issues. Or else, more fall is certain as more and more skeletons will tumble out of the cupboard.
• Do not buy companies hitting new lows which have huge debt and major liquidity issues.
• Pay attention to the sector. Realty sector is in the doldrums and there is no hope of any immediate revival. Thus stocks in this sector could only fall further. Also remember – majority stocks in this sector have corporate governance and high debt issues.
• Look at the macro factors around. In today’s scenario where the rupee is depreciating against the dollar, companies with high import content and sitting on major forex loans will have a tough time.
• To buy into low priced stocks is a good idea but not those which are in a crisis mode. On the other hand, if it is a veritable blue-chip like Dr.Reddys, even notwithstanding the US FDA crisis, every low is a perfect time to accumulate this stock as a company of this big a repute is sure to get over this crisis. They simply cannot afford to go down!
• Do not buy the penny stocks hitting rock bottom – there is no “Infosys or L&T” in the making there.
• Sectors like infra, capital goods have solid stocks; keep an eye on these stocks as they will stand to benefit the most when the reform process takes off. L&T, Thermax, Crompton Greaves are few very strong companies and they never go out of the “blue” list.
• The right time to go bottom fishing is when markets show a few days of higher closes or even if it shows consistent weekly higher close.
• Be like this investor– Ashalata Maheshwari. Buy quality, high dividend paying stocks and be a long term investor. Then such vagaries and falling knives will not hurt.
• Buy blindly into stocks mentioned in our Stock Recommendation section, you will never go wrong. DCM Shriram, Zee Media, Kesoram Inds, Ujjivan, Sandur Manganese, A Birla Nuvo and many more blue chips.
• Simple rule of investing – stick to companies whose business you can understand and if they are into exotic forex instruments, steer clear. Balance sheet is the guiding star, follow and understand it, you will never go wrong.

Bottomline – catching a falling knife is dangerous so be careful to avoid getting blood on your hands.