This should be the thumb rule for investors who are trying to catch the falling knives on Dalal Street, by lapping up beaten-down shares of companies like DHFL, Yes Bank, PC Jewellers and others.
Empirical evidence suggests only once in a blue moon does a stock regain its previous lustre after it is battered down to one-fourth of its value.
Market veterans agree. They say the number of stocks that have regained their previous peaks after such a battering can be counted on fingertips.
According to a study by ICICI Securities, out of about 250 stocks that lost over 75 per cent of their value since calendar year (CY) 2010, only 14 have managed to regain previous highs. Between CY13 to CY16, all the 71 names left investors with a notable after-burn.
The last two calendar years (2018-19) have been a mixed bag for the domestic equity market, but second-rung stocks have taken a hard knock, eroding up 99 per cent of investor wealth. BSE Midcap index has fallen 18 per cent and the Smallcap index 30 per cent.
The latest bets on beaten-down stocks comprise dense hope and rickety possibility of them turning out to be multibaggers. But the reality is not at all encouraging.
Mumbai-based value investor Vijay Kedia says some of the beaten-down stocks may never hit their previous historical highs.
“There are some stocks which may not recover for next 5-10 years. They have problems on balance sheets and face questions over their managements. Some may have once touched historic high prices, but may not touch those levels again,” he said.
Shares of some of the known names such as JK Lakshmi Cement, Heidelberg Cement, Srichakra Cement, Hindustan Engineering and Industries and Uttam Value Steel are still down up to 99 per cent from their respective all-time highs hit in the early 90s.
It is impossible to gauge how low the stock price can go, if it is caught in the vicious cycle of a weakening operating environment, deteriorating investor sentiment towards the stock, systemic risk, questions over corporate governance and risk of default, say experts.
Deven Choksey, Group Managing Director, KR Choksey Investment Managers, says generalisation of companies will not be a very good idea. “The companies that manage to come back are fundamentally stronger. Rest lag on price and valuation.”
Vinod Karki, Vice-President for ICICI Securities, says attraction for the beaten-down stocks grows out of greed to make disproportionate returns, while consistent and quality businesses only promise reasonable returns, especially when their prices are high.”
Earlier in CY10, only nine out of 77 scrips regained their previous highs after a big fall. In CY11 and CY12, only three and two stocks, respectively, managed this feat. Even if a stock bottoms out, a recovery to a previous high has been rare, which is the main reason for buying stocks after a sharp correction in the first place.
In a couple of instances, First Source Solutions fell to Rs 6 from Rs 37 in 2010, losing 84 per cent of value. It regained its previous peak in June, 2014. Then it went on to hit a high of Rs 63.60 in November 2018.
Similarly, Balrampur Chini Mills, Future Enterprises, NCC, Brigade Enterprises, Prakash Industries, Sterlite Technologies and SpiceJet are names that which had eroded 75 to 85 per cent of investor wealth at some point but regained their peak levels.
In 2011, Kiri Industries took a big knock, falling to Rs 13 from Rs 502, which ruined 98 per cent of investor wealth. The stock traded at Rs 793 in January, 2010 and reclaimed its peak in December, 2017.
In 2011, Ahluwalia Contracts and Bharat Financial Inclusion reached the previous highs after losing up to 80 per cent of their value. In 2012, Orient Papers and Industries and Titagarh Wagons lost their value up to 86 per cent, but managed to rebound to previous highs.
The study by ICICI Securities showed that most of the beaten down stocks of past years had caused permanent erosion of wealth for investors, who had tried to hunt multibaggers but ended up eroding their portfolios.
Equity benchmark Sensex scaled its fresh record high of 40,344 on October 31, 2019. For investors looking to pick stocks from among the beaten-down names, Choksey’s advice is to put money in companies that can deliver consistent and better results, has minimal debt on books and a solid management.