Nearly 90 percent of the top 500 companies on the BSE have given negative returns since January 20 when the S&P BSE Sensex hit a record high. 71 of those firms have fallen more than 50 percent in the same period.
One way to look at the fall is – stocks are available at a 50-80% discount from the price which they were trading at just 3 months back. The other way could be to analyse the reason behind the fall and then make an informed decision to either buy or sell.
The 71 companies in the S&P BSE 500 index that fell over 50 percent include Canara Bank, Dish TV, Delta Corp, Future Retail, Gayatri Projects, RBL Bank, Repco Home Finance, and Prestige Estate.
Note: The list is for reference only and not a buy or sell recommendations
Many sectors and companies might undergo a sea-change in the post-COVID-19 world. The outbreak of the COVID-19 virus will have a subsequent effect on the physical and economic ecosystem, and the consumption pattern of the entire world will have a noticeable change, suggest experts.
For instance, work from home could become a normal practice, virtual markets will be strengthened further, defense systems against viruses would see more capital allocation, traveling patterns will change drastically, overall deleveraging etc., they say.
“This (COVID-19 & impact on sectors) will impact the long-term growth prospects of companies in the various sectors for better or worse. Although valuations have taken a beating, it is important to check these valuations in the context of the entire ecosystem,” Dinesh Rohira, Founder and CEO, 5nance.com
“Buying into the future should be selective and done prudently judging the impact on consumption patterns, it is even more important during such volatile times. The near term will see a drop in growth due to the lockdown and social distancing, hence opportunities to buy can be plenty as volatility will continue. The idea is to remain prepared and invest in a staggered manner,” he said.
Rules to buy beaten-down stocks:
Experts feel that there are few factors which investors should keep in mind while buying beaten-down stocks especially at a time when the COVID-19 outbreak has virtually halted economic activity in most countries across the globe.
“As of now the extent of restrictive phase even after the opening of lockdown and the overall impact is very uncertain and thus one should invest only in companies, which are beaten down merely due to FII selling pressure but have an otherwise robust business model, or are low-cost producer, have no balance sheet risk and cater to the essential need of the consumers,” said Sameer Kaul, MD & CEO, TrustPlutus Wealth Management Services told Moneycontrol.
Here are the factors which one should keep in mind -
Expert: Sameer Kaul, MD & CEO, TrustPlutus Wealth Management Services
Study the balance sheet:
Few factors should be considered before hunting in such a volatile period. First and foremost is to look at the balance sheet risk in a tough period and see if the company has high leverage and high fixed cost. If that’s the case, it will be difficult for the company to service the obligations.
Free Cash Flow Generation:Does the company’s business generate free cash flow to sustain or survive its current obligations or will it require more capital as given that capital will be available easily in the current scenario?
Does the company produce an essential commodity:
Are the company’s products essential in nature or are they luxury or discretionary? In tough times, a lot of discretionary spending will be pushed forward or maybe down traded and thus growth may actually come down significantly.
Expert: Dinesh Rohira, Founder and CEO, 5nance.com
In the current environment, there are some businesses that will benefit. These are the companies with products that have non-discretionary demand and low elasticity to price.
Many companies that can change quickly with the times will be at an advantage. Adapting products and services to the environment is key, such that it can benefit consumers.
Across the board, valuations have become reasonable. Still, recent financials can have a bearing on the continuing performance. Sometimes very low valuations can also mean that poor fundamentals are expected to remain or further deteriorate.
Companies with lower levels of debt are always in a better position to tide through tough times. They are the ones that have more capacity to survive and change according to the requirement.
Many companies implement technology to their advantage. It is even more critical during such times as social distancing could mean more virtual dependence.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.