TO CATCH A FALLING KNIFE WITH A RAZOR'S EDGE...

By Ruma Dubey

Take a look at some of the stocks which have hit their life time lows today – Bajaj Hindusthan, Ballarpur Industries, Electrosteel Castings, United Bank, Unitech, Triveni Engineering, Titagarh Wagons, Tecpro Systems,  KFA, MCX, Oberoi Realty, MOIL, Pratibha Industries, Orissa Mineral Development, Orchid Chemicals and many more. And the list of stocks which have hit new 52-week lows since yesterday is scary – almost every fourth or fifth stock traded seems to have hit a low.  Currently of 2184 shares being traded, 659 are on the advance while almost double, 1379 are on the decline.  

One need not be a stock market specialist to say that bears seem to holding the markets in a tight grip. Moods remain despondent with no major positive trigger at sight. Yet, even when there is a sense of hopelessness on Dalal Street, many are on the prowl, looking for bargains. Call them scavengers or whatever, they buy every time there is a carnage; they scavenge through the rubble, looking for a good bargain.  When stocks hit new 52-week lows or life time new lows, many rush in to accumulate the stocks. They are right in a way as that is precisely the mantra of Warren Buffett – buy when all are selling and sell when all are buying.

That does make a lot of investment sense but the question is – when to buy? You may bought a large chunk of shares after it had hit a new low, having the patience to sit on it for some years till moods and markets improve. But what do you do when the stock continues to fall, hitting new life time lows? It is good to catch a falling knife but how do you ensure that you do not get hurt?

A few points to keep in mind when you catch such sharp falling knives:

• Buy only into sound companies, with no corporate governance issues. Or else, more fall is certain as more and more skeletons will tumble out of the cupboard.
• Do not buy companies hitting new lows which have huge debt and major liquidity issues. SK Kumar Nation is one such company.
• Pay attention to the sector. Realty sector is in the doldrums and there is no hope of any immediate revival. Thus stocks in this sector could only fall further. Also remember – majority stocks in this sector have corporate governance and high debt issues.
• Look at the macro factors around. In todays scenario where the rupee is depreciating against the dollar, companies with high import content and sitting on major forex loans will have a tough time.
• Stocks like MCX and Financial Tech are today in a crisis mode. There is no clarity yet on what could be the outcome. So best to stay away for now from such stocks; catching such falling knives could get blood on your hands.
• When blue chips hit rock bottom, buy them. Today, no one is talking about fundamentals at all but this trait never goes out of fashion. Once markets improve, fundamentals will once again become a priority.
• Sectors like infra, capital goods are down in the dumps. But there are solid stocks in this sector; keep an eye on those stocks as these sectors would be the first to bounce back when there is even a small sign of growth picking up.
• The right time to go bottom fishing is when markets show a few days of higher closes or even if it shows consistent weekly higher close.
• Be like this investor we have mentioned in our Corporate Inklings section – Ashalata Maheshwari. Buy quality, high dividend paying stocks and be a long term investor. Then such vagaries and falling knives will not hurt.
• Simple rule of investing – stick to companies whose business you can understand and if they are into exotic forex instruments, steer clear. Balance sheet is the guiding star, follow and understand it, you will never go wrong.

Bottomline – catching a falling knife is dangerous so be careful and avoid getting blood on your hands.