Bargain hunting is a normal exercise which investors do to pick value at basement prices so that maximum returns can be derived over a period of time. This is normal behavior for any buyer of goods and services. When picking stocks it is worth remembering that while many value stocks become undervalued in depressed markets not all stocks which are trading at their historic lows are value for money. These are either stocks which have gone out of favour because of weak fundamentals and prolonged periods of underperformance vis-à-vis the benchmark indices.
One authentic indicator of slow moving, underperforming stocks is their price behavior over extended periods of two to three years. During this period one gets the overview of the stock performance relative to the benchmark index.
Take for example, start of a bear market phase in January 2011 when the BSE Sensex peaked at 20,665. Thereafter, the markets kept sinking till it reached the bottom of 15136 in December 2011 as investors were disappointed with high inflation, stagnating capital investments, depreciating rupee and large FII outflows and slow economic growth. Markets recovered very slowly in 2012 and picked up momentum only from August-September when finance minister P Chidambaram came out with bold measures to rein in the fiscal deficit and deflate the subsidy bill by raising diesel prices. The government also seized the initiative by raising FDI in retail, broadcasting and aviation sectors of the economy.
The markets entered a new orbit and within three months the market was within sniffing distance of its two year high of January 2011. During this period, several stocks moved against the current when the overall market was in high tide and in fact sank to new lows. Why did this happen? Well each stock had its own sob story which investors would do well to remember.
Here are a few examples of stocks which have turned sour and should be avoided till their fortunes improve. At the moment their outlook is cloudy at best.
IFCI– For years now, the government is trying to get a strategic investor to get this weakling up and running. Obviously, investors are hard to find unnerved as they are by the bloated distressed asset levels of this financial institution. It is an open secret that IDBI which holds sizable stake in IFCI refuses to play the role of its savior by merging the company with itself. Recently, the government became the principal owner of the company on conversion of its debt into equity. Concerns over its asset quality and its ability to sustain earnings in a fiercely competitive financial services industry have taken its toll on its market performance and investors have clearly given it a thumbs down. No wonder, between the two peaks of Jan 2011 and January 2013 when the Sensex has got fresh momentum, IFCI continues to languish and it has in fact fallen from Rs 62.55 (as on Jan.6, 2011) to Rs 38.35 (on Jan.15, 2013) although the Sensex is back to its Jan. 2011 high.
Educomp Solutions– One of the largest education company in India, Educomp has paid the price of financial overleveraging. Its interest costs shot up nearly six times between 2008-09 and 2011-12 while its income during this period grew just 100 per cent to Rs 1076 crores. Adequately reflecting its sagging fortunes, its share price behavior was disappointing in the last two years when it slipped from Rs 534 (as on Jan.6, 2011) to Rs 141 (as on Jan.15, 2013) although the benchmark Sensex was more or less at similar level. Margins are clearly under pressure in an overheated education space with many more players vying for a piece of the cake, making it even more difficult for Educomp to retain its market share without letting its costs go haywire. This is obviously another example of what I mean by a slow moving stock.