FALLING MARKET, BUYING OPPORTUNITY?

about 5 months ago
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The market crashed 560 points on Friday and even today, the fall continues as it remains over 350-390 points low. At current reading of 37,944 points, the fall seems precipitous but look at it from a distance and you will realise that it is still not far from its all-time high of 40,312 which it hit in June.

The data at the moment shows that declines led advances and while 24 stocks did manage to hit a new 52-week high even in this market, 509 stocks have today hit a new low. These are stocks mainly from the midcap range – the same stocks which had run up, way ahead of their fundamentals when the moods were only optimistic.

The market probably was living under a dream that the second term of Modi would means more sops and more tax cuts but practically looking, given the tight spot it is in in terms of fiscal deficit, with Govt spending going out of control, to have expected even a “soft” Budget was naïve. The Govt is now scrambling around like a headless chicken, taxing anything that moves! If FY19 Budget was a spoiler on account of Long Term Capital Gains Tax, this time around there were a list of grouses – cut promoters stake to 65%, tax on buyback, tax on dividends, tax on the super-rich.

FIIs, in this month of July, till 19th, Friday were net sellers at Rs.6475 crore worth equity but DIIs have provided the balance by being net buyers to the tune of Rs.6572 crore. In fact for May as well as June, FIIs have been net sellers only.

So when the markets are seemingly falling through the floor, what does a retail investor like me and you do? Instead of merely watching and doing, “tsk, tsk” and blaming the Govt, use the liquidity to buy some quality stocks that have hit new lows. 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 bears seem to holding the markets in a tight grip. Moods remain despondent with no major positive trigger at sight. Yet, even when there is a sense of hopelessness on Dalal Street, 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, like Amtek or Dabur with its Nepal crisis. 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!
  • When blue chips hit rock bottom, buy them. Today, no one is talking about fundamentals at all but this trait never goes out of fashion. Once markets improve, fundamentals will once again become a priority.
  • Sectors like infra, capital goods are down in the dumps. But there are solid stocks in this sector; keep an eye on those stocks as these sectors would be the first to bounce back when there is even a small sign of growth picking up. L&T, Thermax, Crompton Greaves are few very strong companies.
  • 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- DCB Bank, NCC, GSK Consumer, RBL Bank, ICICI Bank, Container Corp, Jamna Auto, HUL, HDFC, Asian Paints, Maruti, M&M.
  • 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.

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