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, investors could be led to believe that value investing is easy. 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.

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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 falling knife
Not every stock that has fallen in the last one month or so is attractive. 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, 336 stocks have fallen by a minimum of 10% and as much as 75%. But buying stocks that are already falling is not a sure-shot recipe for success.

Fund managers have different views on how they approach the correction. According to Quantum AMC’s Atul Kumar, who manages the value investing oriented Quantum Long Term Equity Fund, there has been a good correction in stock prices. “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. Investors should take advantage of recent fall in stock markets and put more money,” he said.

However, according to 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. We have about 27.94% in cash holding and arbitrage positions, which can be deployed in long-term investments at appropriate levels,” Thakkar said in a note to investors.

Roller coaster ride
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 you had bought with deep value, don’t move for long periods.

Between 1995 and 2000, IT stocks were winners. But in between 2001 and 2007, they did not perform as well as capital goods, banks and auto stocks. Infrastructure stocks were the darlings in 2007, but 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.

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 and 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 investments in their US businesses to transform from being a generic to speciality focused player. Results of these investments will start reflecting in their earnings in the medium term,” said Murarka. 

About the industrials sector he said, “The sector was 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 and companies would benefit from the same,” he added.

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However, 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,” he said.

Source: DNA Money