Sanjoy Bhattacharyya, in his article in Forbes, (Panic-Induced Sell Off in Stocks Could be a Buying Opportunity) has advised investors to look out for stocks whose prices are driven down in panic selling and to buy them. He points that usually a short-lived earnings disappointment or an unexpected calamity leads to panic selling and creates incredible swings in the emotional pendulum of investment analysts.
Sanjoy Bhattacharyya explains that the reason this happens is because the day traders cannot tolerate any losses and are the first to sell. This leads to a chain reaction amongst the investment advisors and other funds who are anxious to be quick to dump the stock. The selling barrage creates a self-perpetuating story for the investors.
Sanjoy Bhattacharyya cites the example of PSU banks and capital goods manufacturers whose stocks are being shunned owing to the high interest rates in the economy. Investors who are sensible contrarians and who can exploit the fickleness of markets can make a lot of money in the process, he says.
However, Sanjoy cautions that investors obviously cannot blindly rush to buy a stock only because it has reached a 52 week low because such lows may be the result of permanent fundamental deterioration and not just panic selling. Investors must rationally understand the reasons for the fall in the stock price and whether it is justified by fundamental reasons or not. Investors must review the ten year history of the company’s fundamental to avoid getting carried by recent price behaviour, Bhattacharya warns.
Sanjoy cited the example of VST Industries as an example of what he is saying. “It clearly qualified as a fallen angel in my book” he said because it had a highly predictable business with stable margins and very limited capital requirements for future growth. He also pointed out that VST Industries’ compounded annual growth rate (CAGR) over the last nine years in net revenues and net worth was just over 10 percent, while the corresponding number for post-tax profits was 16 percent. He also emphasized that dividends had compounded at 32 percent during the same period and it was debt-free.
Some other examples of stocks that have got pumelled owing to bad new is Maruti Suzuki (the strike at the Manesar plant) and Indiabulls Financial Services (the damaging research report by Veritas).