Fomo, or fear of mission out, might be nudging you to buy stocks with both hands this season. And you surely have plenty of options to choose from to play the ongoing rally. The problem is, you might not know this is a minefield.
Data available with Ace Equity shows some 493 stocks on BSE declined over 50 per cent in 2019, and it is not necessary that all of them corrected because of issues with their business fundamentals.
Analysts believe select stocks provide good entry points and may deliver humungous returns going forward.
Stocks like Future Consumer, Magma FincorpNSE 4.99 %, Central Bank of India, WockhardtNSE 1.91 %, Zuari Global, Chennai Petroleum and Indian BankNSE 0.00 % declined 50-60 per cent last year. And then there are those like GBL Industries, Cox & Kings, Talwalkar Healthclubs, Mcleod RusselNSE -1.08 %, Midvalley Entertainment, Sankhya Infotech and Parab Infra, which tanked 95-99 per cent.
“All the stocks that have fallen need not be good buys. Some may never recover. However, a number of them may have been collateral damage, being in the midcap and smallcap space, and they could provide a good opportunity. One needs to be selective,” says Ambareesh Baliga, an independent market expert.
BSE benchmark Sensex advanced 14 per cent in 2019, while in the broader market, BSE Midcap and Smallcap indices slid up to 8 per cent. The market is hoping for the recovery in the midcap and smallcap space due to attractive valuations. There are hopes that a possible recovery in GDP growth rate is likely to infuse a lot of enthusiasm among retail investors in 2020.
“Midcaps and smallcaps are closely linked to economic growth. While you cannot predict economic growth, we carry this optimism that GDP growth will come back. I am confident the economy will grow,” Sunil Subramaniam, MD & CEO, Sundaram Mutual Fund, said in an interview with ETNOW.
Besides the 493 big losers, some 1,333 other stocks declined up to 50 per cent during the year. In all, 80 per cent of BSE-listed stocks wiped out investors’ wealth last year.
“Calendar 2020 will most likely reward the smallcap and midcap (SMC) space. Historically, whenever this space has got beaten down badly, it bounced back substantially. This segment as a whole once gave 200-400 per cent returns in a span of 2-4 years after such a meltdown. Of course, history doesn’t repeat itself. However, there is a sound logic that after every such underperformance, the relative valuation of the SMC segment becomes extremely appealing,” said G Chokkalingam, Founder, Equinomics Research and Advisory.
As many as 583 stocks declined over 50 per cent on BSE in 2018 and against 54 in 2017.
Brokerage ICICIdirect says stocks that plunged over 60 per cent last year might have declined owing to deterioration in financials, like a decline in revenues and profitability or continued losses and high leverage or sub-optimal return ratios. Also, many such companies had high levels of promoter share pledges, which could have negatively impacted stock prices, it said.
The moot question that needs to be answered is whether these stocks are worth bargain hunting post the decline. Can they recover their lost glory and touch earlier peaks?
Empirical evidence on stock price recovery after a significant decline shows bargain hunting in such beaten-down stocks would not be a credible strategy, as rarely do such stocks recover to earlier levels.
“The strategy to invest in severely beaten-down stocks is not based on a sound understanding of revival in operational performance, rather based more on hopes that they will turn out to be multibaggers,” says ICICIdirect.
“The reality is not at all encouraging. In last eight years, very few stocks have regained previous life-time highs after having corrected 60 per cent or more,” the brokerage said.
Chokkalingam says themes like sugar, mid-sized IT and small pharma companies focused on API exports, tyre stocks, cash-rich and attractively valued PSUs and old private sector banks should play out successfully in 2020.