WHY ARE PEOPLE BUYING 'CONTRARIAN'?

By Ruma Dubey

Swimming against the tide seems to be the ‘in” thing to do today. That is precisely what many Indians as well as FIIs seem to be doing.  

Buy when others are selling and sell when others are buying is a very well-known trading concept. This same strategy is tweaked today to – buy into stocks which scream ‘sell’.

Contrarian buying. This is the new trend and it seems to be spreading far and wide. People are looking for opportunities in stocks which look obviously out and gone today. For eg: India as a story does not have much to offer today. Our politics is stinking like a skunk and this stink has spread all over – social and economic life also stands badly affected. China looks better in comparison, yet FIIs are flocking to buy into India and their love does not seem to have diminished. So aren’t they buying contrarian?

The same psyche is seen amongst the retail investors too. They are buying in truck loads into companies which have been beaten down and financially, at the moment seem to have hit a morass. The moment a stock hits a new low, people want to know if it is a ‘good buy’?   Kingfisher Airlines emerged as the ‘hot’ favourite – every time more bad news came in and the stock sunk down further, people rushed to buy. A company with a debt of around Rs.8000 crore, salaries of staff unpaid, mounting losses and a flamboyant owner; yet KFA is on the ‘buyers’ list as the belief is that the Govt will not allow the airline to sink and maybe FDI in aviation will save this sinking company. There is also hope that if nothing else, Mallya can sell stake in his flagship company and bring in the money. Thus the belief is that things could get better, it is only a matter of time.

Then there is Suzlon where again, currently the company seems to be in a bad shape but the hope is that once the interest rates start coming down and given its order backlog of Rs.39,700 crore, things are sure to start looking good when overall macro factors improve.  Many such stocks – Sintex, IRB Infra, Adani Power are on the ‘contrarian’ buying list.  Last week, our Editor, in the Stock Recommendation column, put out a ‘buy’ for SBI post the Q1FY13 results though the market pummeled it down on worries over asset quality. This week, the ‘buy’ call is for SKS Micro. In both the cases, the recommendation is because the long term story, for both, looks good.

This fascination for contrarian buying is due to two factors. Firstly, the stock price is going abegging, probably around its 52-week low; so what else could be a bargain buy? Thus by picking up at rock bottom prices, the feeling is that it cannot go down further which in turn means their losses are restricted. Secondly, once things start looking up, the margin of gain which such stocks will make will surpass that of other stable and much sound companies.  Everyone remembers Satyam Computers. The stock had hit a low at Rs.11.50 when the scam broke out and today it is at over Rs.100. So those who had spent Rs.11,500 on buying 1000 shares in 2009, today are sitting on a gain of Rs.88,500!  All those who missed the Satyam bus in 2009 do not want to repeat the same mistake again and thus are buying into companies which today spell bad news. 

But one reason underlying both these reasons is the hope that things will only improve and such big companies will not be allowed to go down. This is exactly what the FIIs also feel – things will improve in India and when it does, they want to ride the crest of the boom.

Like all investment bets, this method of buying is also fraught with risks. Even if you buy into contrarian stocks, remember to limit your losses incase your gamble does not pay off. Do not back companies where the morality of the management has been under investigation in terms of compromises on corporate governance standards and accounting practices

Yes, you can swim against the tide but recognize your stamina and sustainability first or else you could drown half way through.