UP For Grabs Beaten down stocks for 2019

At the beginning of every year, it is customary for investors and market participants to forecast and ascertain where the markets will close at the year end. Come 2019, the market is already abuzz with various potential index levels that investors can expect by December 2019.

Different strategies are being explored by traders and investors. Few investors are betting on mid-caps and small-caps for outperformance, while few are betting on option trading for consistent profits, irrespective of market direction. There are few investors who believe that the large-caps are overvalued and may underperform. There is a group of investors who thinks one should wait till the general election results are out, while there is another set of investors who thinks that one should invest in the first six months of 2019 while the volatility is at its peak.

The concept of buying beaten down stocks is not new to investors. The stock prices have fallen by a huge margin in 2018 and this market condition has created multiple investment opportunities. These are exciting times for value investors and for those investors looking for bargains in the current market situation which has generated numerous opportunities. Almost 373 stocks out of the BSE 500 stocks are trading in the negative terrain on a YTD basis in 2018. Also, on a YTD basis, almost 605 stocks having market capitalisation of more than Rs 500 crore have failed to generate positive returns. Out of these 605 stocks, there are as many as 109 stocks that have fallen by more than 50 per cent on a YTD basis. Also, for the quarter-ended September, fund managers increased stakes in as many as 310 stocks which have market capitalisation of more than Rs 1000 crore and have fallen up to 70 per cent in 2018. The stocks in which the stakes were raised are Manpasand Beverages, Infibeam Avenues, Simplex Infrastructure , IIFL Holdings, JM Financials, Navkar Corporation, Indian Bank, Symphony, Kajaria Ceramics, Dilip Buildcon and Greenply Industries.

The issue with the beaten down stocks is that these have been beaten down for a variety of reasons and it may take more time than usual for the stock prices to recover. Apart from performing the mandatory fundamental check for each of these stocks before investing, what investors can do with these set of chosen beaten down stocks for investing is that they can increase their investment horizon. For example, if your holding period is usually one year to 18 months, while investing in beaten down stocks, you have to knowingly increase the investment horizon from 18 months to at least 24-30 months to provide enough time for the investment to grow.

"I have been successful so far in the markets. Even in 2018, when most of my investor-friends were struggling to beat the markets, I managed to generate decent returns. However, for 2019, I have to still finalise what should be my strategy and whether I should allocate more funds for midcaps and small-caps. Most importantly, I am clueless right now about what strategy will help me beat the markets in 2019. However, I am keen to look at the beaten down stocks in 2018 for 2019."

- Arun Kumar from Chennai

While constructing a portfolio for 2019, investors should not ignore what the markets taught us in 2018. What did 2018 teach us? Investors were taken aback by the poor performance of the broader markets in 2018. Basically, 2018 taught investors lessons in equity market the hard way. Some of the things that 2018 taught us were:-

1 Never Chase Popular Stocks

Investors were caught on the wrong foot investing in highly popular stocks such as Aditya Birla Capital, DHFL, PC Jewellers, Manpasand Beverages, Vakarangee, Jet Airways, Infibeam, Rain industries, etc. These popular stocks corrected in the range of 50 to 80 per cent and were widely owned by retail investors in 2018 at least. The correction was so sharp in these counters that investors could not book profits in these stocks.

2. It Is Risky To Attempt Catching The Falling Knives

Very few investors have learnt the art of catching falling knives and have a successful record of doing so. Many investors were caught averaging stocks when the stock prices were falling, only to witness the prices falling sharply further down. Investors would have been better off not catching the falling knives in 2018.

3. Every Industry Has Its Up-Cycle And Down-Cycle

Investors tend to focus on those sectors that have historically given better returns. NBFC is one such example. The Indian NBFC sector had been on an exceptional growth trajectory in the last few years. Money, both institutional and retail, was flowing steadily into the NBFC sector until the second-half of 2018. However, in 2018 the NBFC sector went through turbulence after the IL&FS default while maximum investors were investing in the sector hoping for outperformance. No sector can continue to grow without break and investors need to discount this while constructing their portfolio. Investors should not concentrate on any single sector but should diversify across sectors. It is witnessed in the long history of the markets that the markets love rotation of sectors. If NBFC was the star sector in 2017, it was IT in 2018, and it could well be any sector other than NBFC or IT that may outperform in 2019. Sectoral allocation is the key to success in the markets. 

4. Stock Market Has No Preference For Political Parties:-
2018 saw the ruling party losing three large states in the state elections. It was believed by majority of the investors that if the BJP loses all the five states, the markets may crash. However, the way markets reacted to the rout of the BJP in these elections suggests that the markets do not have preferences for any political party and have a tendency to follow their own course.

5. Adopt A Portfolio Approach
In a tough market condition, what can really help investors is a well-built portfolio. Stock selection at times can go wrong, however, a well-constructed diversified portfolio can hardly go wrong. Stocks have tanked up to 80 per cent in 2018, but it is a low probability event that a well-diversified portfolio can go down by more than 50 per cent even in tough market conditions. A well-diversified portfolio constructed after studying the risk profile of the customer should be a perfect blend of small-caps, mid-caps and large-caps and should be represented by growth sectors. Those investors who did not adopt a portfolio approach were seen suffering the most in 2018.

What can be done in 2019

While political fights, NCLT cases, broader market underperformance, IL&FS crisis, higher crude oil prices, weak Indian rupee, SEBI guidelines on realignment of MFs and strong SIP inflows from domestic investors were the highlights of 2018, the story could be much different in 2019. Investors can identify the beaten down stocks to construct a well-diversified portfolio in 2019. The beaten down stocks with attractive valuations should be looked at for investments in the coming year. We have compiled a list of such stocks which we believe are available at attractive valuations and have not done well in 2018, but we believe these stocks can do well in 2019.

Conclusion :-

Owing to the challenges faced by the investors in the difficult year of 2018 for, the expectations from the markets in 2019 are benign. As such, chances are that the markets will exceed investors' expectations in 2019. While there may be no reason to be very bullish about the markets, there is no reason to be bearish either. Globally, a lot will depend on the tariffs levied by the US on the Chinese goods. If the entire 25 per cent tariffs are levied on all imports from China, the earnings impact could be significant with the potential to bring down prices of the US stocks. It goes without saying that the first-half of 2019 is going be choppy. The margin of safety is higher in emerging markets when compared to developed markets, and hence, the risk is lower for equity investors who prefer investing in emerging markets.

Without doubt, Indian markets stand a good chance of outperforming their global peers in 2019. Investors can look at investing in those stocks with higher margin of safety at this juncture and definitely such stocks can be found from the list of beaten down stocks.