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On discount: 5 factors to consider while picking up beaten down stocks

In a bearish scenario, sector leaders with relatively stronger balance sheets, higher earnings visibility, strong cash flows, and management with a good track record should be preferred.

April 02, 2020 / 12:21 PM IST

Indian market is down by about 30 percent from its peak of 12,420 recorded on January 20, and by about 23 percent in the financial year 20, but the big carnage happened in individual stocks.

As many as 175 stocks in the S&P BSE 500 index lost more than 50 percent of their value in the last 12-months that include names like Dalmia Bharat, VIP Industries, Axis Bank, JustDial, Reliance Infra, Reliance Capital, Dish TV, Vodafone Idea, as well as PNB Housing Finance.

Well, beaten-down stocks might look attractive because they are available at a considerable discount when compared to the year-back level. But, experts beg to differ.

Not every stock which witnessed selling pressure is an attractive buy. “In a bearish scenario, sector leaders with relatively stronger balance sheets, higher earnings visibility, strong cash flows, and management with a good track record should be preferred. Investors should avoid companies with high leverage,” Mahesh Patil, CIO – Equity, Aditya Birla Sun Life AMC told Moneycontrol.

At one glance, beaten-down stocks could look a better play looking at the valuations but, investors should also focus on factors that led to the fall in specific stocks.

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Investors should study the factors which led to the fall – is it because of structural changes in the industry, or is it company-specific issues or FII selling. They should also map the growth potential of the company’s product.

Experts advise investors to commit to their own strategy in times of market turmoil just the ones which we are going through. If you are a disciplined investor, chances are you would be able to invest money at the right time and punch out when things are not looking favourable.

“The saying goes “Prepare and not Predict”. One of the best ways to behave rationally in a challenging time is to pre-commit to your strategy,” Sameer Kaul, MD & CEO, Trustplutus told Moneycontrol.

“We as human beings are bad emotional time travelers and hence it is always better to have a process-driven decision-making approach that include(s) a well-articulated Investment Policy Statement. Once an Investor adopts this process his or her approach should be the same in a bullish scenario or a bearish scenario,” he said.

We spoke to Dinesh Rohira - Founder, CEO - 5nance.com, and here is a list of top 5 factors which he recommends investors to consider while picking beaten-down stocks:

Growth prospects:

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.

Management Dynamism:

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.

Valuations:

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.

De-leveraged Companies:

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.

Technologically Driven Businesses:

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.
Kshitij Anand is the Editor Markets at Moneycontrol.

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