Stock prices can sometimes fall like a brick, but that does not mean you can bottom-fish. Here's how you can avoid a costly plunge.
If you have ever been tempted to buy a stock that has dipped sharply, think again. Sure, there are many stocks where investors press the panic-sell button because of some negative news. Some may even fall to levels that may look extremely cheap. But remember that there's a lot of volatility out there, and sometimes volatility in negative news-driven stocks can continue for a long time.
If you have been watching the markets, you may have seen that stocks such as Punjab National Bank (PNB), Gitanjali Gems, Fortis Healthcare, PC Jeweller, Lupin and Sun Pharma have been in choppy waters for some time now. So, question that inevitably pops up is - have their prices fallen far enough to warrant an investment?
While these stocks may look tempting, it is good to know the risks before taking the plunge. Retail investors, particularly, must hold back at these seemingly good opportunities, because ultimately they can turn out to be bad investments. Investors should run these stocks past a checklist before hitting the buy button. Here's what they can look for.
Look at the unfolding PNB saga closely. It has several moving parts with investigating authorities attaching properties, forensic auditors assessing the quantum of the loss, and market pundits debating where the bottom can be. To top it up, Nirav Modi made a few noises about how his hands are tied and he did not get enough time to pay the dues. It might seem that PNB can make up the loss by attaching Modis properties.
However, this could be a trap. Instead of hurrying to trade, figure out the cause of the crisis. There is always going to be uncertainty around the event. Its better to wait for the events to unfold.
Recently, PC Jeweller's share price tumbled nearly 60 per cent after rumours that the promoters may be having business dealings with Vakrangee, whose shares were locked in the lower circuit after media reports about the capital market regulator, the Securities and Exchange Board of India, probing the company about stock price manipulation. There was nothing reported on the exchanges and markets were speculating about all the possibilities. Investors who took the plunge burnt their fingers. "When there is uncertainty regarding what is happening in the company, how it will get its business done, what view can you have?" says Sreesankar Radhakrishnan, Head, Institutional Equities, Prabhudas Liladhar. If you can't get to the bottom of the story, its best to sit on the sidelines.
Check the Fundamentals
Look at the stock of Fortis Healthcare. The company is going through a difficult time with the stock tumbling over issues of governance, debt and pledged shares. Many market pundits consider this as a promoter crisis where allegations about diversion of funds to promoter group companies sent wrong signals to the market, compelling bankers to sell pledged shares, further increasing promoters' worries.
On the business front, while there has been some impact, Fortis continues to operate its hospitals and conduct operations. Despite the crisis, the fundamentals of its business in terms of operations, growth, opportunities, brand and strategic assets in a growing healthcare market have not eroded. This is precisely the reason why some investors such as Radhakishan Damani have bought its shares. Global investors such as TPG Capital and Manipal Health Enterprises were seen to be eyeing an acquisition.
The lesson is that if the fundamentals are intact and the issue at hand is transitory, investors may have a good reason to buy. However, if there has been a fundamental change in the business and a company cannot function properly, prices, however low, will never be able to deliver.
Anticipate More Volatility
Whenever there is a crisis, stock prices swing wildly, and then some more. Sometimes, the selling pressure is too huge. PC Jeweller nosedived from about `480 a share before the crisis to a low of `212, losing 50 per cent of its market capitalisation in a single day. However, it recovered swiftly to around `368 levels after the company clarified it had no business relation with Vakrangee. "As investors, it is necessary to look at the price in comparison to revised assumption of the value of the stock. If there is a gap from the long-term perspective, one can look at it," says Nilesh Surana, Chief Investment Officer, Equity, Mirae Asset Global Investments .
PNB lost close to 50 per cent market capitalisation after the Nirav Modi scam. As on March 2017, the bank reported a net worth of Rs 43,000 crore. Even if the entire amount related to the scam is written off by the bank, it will be still left with a net worth of about `32,000 crore, higher than the current market capitalisation of about `24,000 crore. Second, it is possible that the bank may not have to take the entire hit because a part of this would be recovered from the realisable value of assets attached which is pegged at around `6,000 crore. While this is only for the calculation purpose, the aim of the exercise is to understand how much impact is already in the price before making any investment in the stock of a crisis-hit company.
How Soon Will It Get Resolved
In most cases, the trick is to drown out the noise, anticipating the extent of the damage and the time it will take to resolve the issue. Many investors end up getting trapped because they are often not able to figure out if it is structural or a short-term issue. Recently, IT firm Infosys was surrounded by scepticism and investor apprehension after the resignation of key management personnel, including CEO Vishal Sikka. Later, this turned into a huge crisis with co-founders debating about the role and future of the company. Within a short period of time, the stock fell from a peak of about `1,270 to `850 due to fear that management transition could be painful for the company. Doubts emerged as to whether the company could revive and maintain margins, particularly when the external business environment was not good.
Investors, especially those who assessed that this is a short-term issue and not a structural problem, profited. The stock price was so low that even the company went on to make a large buyback at `1,150 a share. Today, after the crisis in September last year, the stock is back to around `1,200 and business is normal.
Gitanjali Gems has many great brands such as Gili, Asmi, Nakshatra that consumers still love to wear. But will the company be able to retain that popularity and business post the Nirav Modi scam, particularly after the raids undertaken at various offices and properties being attached for liquidation? Investors needs to ask if these are short-term worries.
There are many examples to learn from, including companies like Kingfisher Airlines and MTNL which, after the crisis, lost out permanently.
Market Knows More
Investors are often seen on the other side of the trade waiting for the stock to recover as smart money keeps selling. In most of the stressed cases or in cases where companies are not able to bounce back from a crisis, it is typically found that retail investors are holding the stock. According to the last published number, a staggering 91.46 per cent shares of Kingfisher Airlines are held by public.
In many cases, like that of pharmaceutical companies such as Lupin and Sun Pharma, stocks were hammered as a result of pressure in the US market and delayed approval for many drugs and facilities of these companies by the USFDA. Investors, particularly retail, had no clue about why the shares were falling. Many investors averaged down their holdings. However, before doing that, always ask if the market knows something you do not. This will open your mind to a more detailed assessment.
(Kundan Kishore is a Mumbai-based freelance writer)