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Value buying in weak market is tricky

You run the risk of waiting long for good returns when buying beaten-down stocks

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Despite the smart rally in stocks on Thursday, Indian markets are still down 10% in the last one month. Many investors on social media as well as experts are talking about the 'Great Indian Stock Sale' ahead of Diwali. There are lists of 'value stocks' being sent on WhatsApp and emails. Given the situation, it is very easy for somebody to think value investing is no great shakes. If there is a list of stocks that have corrected 50% from their recent highs, buying them is a good idea, right? You couldn't be more wrong. Merely quoting Warren Buffett or Charlie Munger and singing praises does not make you a value investing enthusiast. When a stock falls by 70%, buying it is bottom-fishing. It is not value investing. True value-investing is about buying a stock at a price that is much below its intrinsic value. Read on to know how experts are looking at the correction, as they share with DNA Money their advice to investors.

Catching the falling knife

Renowned investment manager Seth Klarman once said: "Value investing is at its core the marriage of a contrarian streak and a calculator." There are two parts to this statement. One is the contrarian streak and the second one is the calculator. But not every stock that has fallen in last one month or so is attractive. Unless it is a good marriage, stock investing can also make you feel like going through a divorce. There are always stocks that have fallen 50% or more because they deserve this price. There are other stocks too where markets have been extremely harsh in their assessment. In BSE-500, there 336 stocks that have fallen a minimum 10% to as much as 75%. But buying stocks that are already falling is not a sure-shot recipe for success. Often, such stocks fall even further.

Fund managers have different views on how they approach the correction. Quantum AMC's Atul Kumar, who manages the value investing oriented Quantum Long Term Equity Fund, feels there has been a good correction in stock prices at present and the same has been continuing. "Many stocks that looked highly valued now seem within reach. We are likely to find new stocks for our portfolio and cash level can fall further. Over the long term, we remain optimistic on Indian equities. India is likely to grow faster than many nations. Investors should take advantage of recent fall in stock markets and put more money," he said.

On the other hand, PPFAS Mutual Fund's CIO Rajeev Thakkar feels the overall market valuations are a bit stretched especially in the small- and mid-cap space. He doesn't want to paint everything with the same brush. "We continue to look at individual investments on their own merits and will not hesitate to invest if an opportunity looks attractive. As usual, our investment stance does not depend much on the macro-economic situation, but is focussed on individual companies. We have about 27.94% in cash holding and arbitrage positions, which can be deployed in long-term investments at appropriate levels," Thakkar told investors of Parag Parikh Long Term Equity Fund.

Roller coaster ride

There are many investment managers who have previously been tested by value investing. Retail investors who talk about value buying like dazzled teenagers do not seem to understand the same. Since value investing calls are often, a contra call to what the market thinks, it can be a lonely adventure. Each day, you could question yourself whether you bought the right stock. Often, stocks don't move for months and years together if you bought something with deep value

Between 1995 and 2000, IT stocks were winners. But in the next cycle, that is, 2001 to 2007, they did not perform as well as capital goods, banks and auto stocks. Infrastructure stocks were darlings in 2007, but then they fell like nine pins thereafter. Indian stocks have typically displayed six to eight year cycles. In each cycle, most of the wealth is created by a narrow set of companies and sectors. So, if you are buying a stock that has fallen out of favour, it might take you years to really reap the benefits.

Often Indian equity investors follow famous domestic investors to search for cues. But a Porijnu Veliyath, Rakesh Jhunjhunwala or Dolly Khanna may have a very different thinking about buying a beaten down stock than yours. And unless they display a value-buying signal, you will not know it. Copycat ideas don't work well when investors pick up second rung or third rung players, hoping to replicate the leader.

Value investing can also often lead to situations where you might need to double or triple exposure due to correction in the stock. At such a time, the first reaction may be to exit the stock because you have had enough of correction or you have simply run out of money to invest more.

Value hunt

Some fund managers are more confident about finding value in today's markets.

According to Pankaj Murarka, fund manager, Renaissance Investment Managers some corporate banks, some pharma stocks and some segment in the industrial space look attractive in terms of value.

"We can think of corporate banks as NPA cycle has peaked out and corporate banks would see lower provisioning requirement. In pharma, the earnings downgrade cycle is bottoming out. Plus, some large-cap companies have made investment in their US business to transform from being a generic to specialty focused player. Results of these investments will start reflecting in their earnings in the medium term," said Murarka. He also finds certain segments in industrials sector interesting. "The sector got adversely impacted by slowdown in industrial capex in the past few years. This is changing. There are initial signs of pickup in private sector capex. Companies in this sector would benefit from the same," he added.

Some wealth management firms have a different take. Jitendra Gohil, head India equity research, Credit Suisse Wealth Management, India thinks that broader markets are still weak. "While a small short covering is possible in the near term, we expect Indian equities to grind lower in coming months given our expectation of further earnings downgrades mostly led by financials and consumer discretionary, including autos. Fundamentals of equities have worsened further in September with the brent oil price now trading close to $ 85/barrel exacerbating pressure on rupee and interest rates."

While Gohil concedes that after the significant correction in markets there could be a minor bounce back in the coming weeks, his firm is advising investors to apply caution and refrain from aggressive buying.

"We maintain our "book profit view," which was initiated in early September. While we expect strong results from IT and metal companies, the interest rate sensitives (especially the financials) and consumer discretionary sectors could disappoint. Having said that, we expect earnings to see further downgrades in coming months. Valuations for Nifty has already corrected 14% in September, but relative to peers and relative to own historical standards it still remains expensive," he said.

BEING PICKY

  • Not every stock that has fallen in the last one month or so is attractive
     
  • Often, if you bought something with deep value, stocks don't move for months and years together
     
  • You may also need to increase exposure to the stock due to correction
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