Hitesh portfolio

MAKING THE MOST OF CORRECTIONS.

We have had one of the most prolonged corrections in recent memory. Barring the few rallies that have followed the deep corrections, the small and midcap space has been in a slow grind down most of the times and sharp cuts ocassionally. We still do not know whether we are out of the woods. But every cloud has a silver lining and its up to us to find it.

Most investors by nature are optimistic most of the times and hence there are very few investors who are totally in cash when markets are in deep correction modes. Few investors who are in the habit of being partially in cash can have funds to deploy during these dark phases of markets. But for people like me and I guess most others, cash is elusive when markets are in deep correction mode.

I consider market corrections as a time of catharsis and use it for course corrections for the journey ahead. During sharp downswings, even companies that have reported decent numbers and have given promising outlooks do correct to varying degrees. This is usually the opportunity one needs to grasp. These are best times to get rid of the laggards, and stocks with the least conviction and utilise these funds to get into companies which promise good growth.

For finding these companies with good promise, the simplest method is to look out for companies which have reported numbers which qualify as “positive surprise” numbers. One trick we can use is to find out market reaction to the numbers in the immediate few days post results. If results have been a positive surprise, then there would have been gap ups, or sharp rallies in these names and when there is market weakness, these names too give up most of their gains and come back to breakout levels or slightly below breakout levels. Idea should be to try to monitor their price moves and buy at opportune levels. These very stocks will bounce back very quickly once market corrections are on the verge of ending, or upmoves are on the verge of starting. And then they rally hard.

I consider two class of companies important to implement above strategy. First is the category where better than expected results have already reported for a quarter or two ( or sometimes 3-4 quarters) and still stock prices have not moved much to price in these numbers. Or after a brief rally post results, have given up most gains. These are usually the easiest low hanging fruits and offer good prospects of finding winners. The trick lies in figuring out the sustainability of earnings growth. This is a strategy which often provides a quick 20-50% upmove once markets regain some strength. This is a variant of price performance anomaly which can be used to generate better returns.

The other is a category where narrative is strong and numbers are yet to be reported. Many a times in bull markets, strong narratives will lead to more than expected upmoves. And when general markets weaken, these very stocks give up most of their gains and some more. But if through scuttlebutt, and/or guesswork or some other method ( like monitoring order book in company or its competitors etc) there is strong conviction that the earlier promised growth is going to materialise sooner rather than later, there can be a case for revisiting these names, or adding more as per portfolio allocation diktats.

I am consciously not taking names to avoid spreading any biases. With screener providing easy means to screen out companies based on reported numbers, investors’ job has become a bit easier.