Will your stocks ever revert back?
How to find if the share of the company you are invested-in, will revert back or not.
I analysed 19 companies randomly whose stock price fell more than 60% and found a few common things:-
1. 70% of companies had not paid any Dividend for the last year.
Dividend is the only cash that flows from the company to the shareholders as long as it is a going-concern. Dividend indicates the liquidity position of the company to a great extent, though not fully.
2. Management sounded confident statements when the first time some corporate governance issues evolved.
Every company wants the damage to share price as small as possible. Promoter(s) lose money in direct proportion to fall in the share price. Also, steeply falling share price sends a poor signal to other stakeholders like Suppliers, Debtors, Creditors, Employees, other investors etc. Don't rely solely on the management commentary, numbers should speak the same story. Also, never forget to read the footnotes.
3. Retail investors raised their stake in 100% of the cases, while financial institutions reduced considerably.
In almost all the cases Value fell much faster than Price. Retail investors are strongly focussed on price. What retail investors don't realise is, it is the Value that counts. Price has to follow Value sooner or later.
4. If your stock has fallen more than 60% from the peak during the last 20 months then chances of complete pull-back are remote.
Every stock has certain correlation with respect to the Index. Thus Reliance Industries has close to 100% correlation with Sensex/Nifty. In stock parlance, this correlation is known by the term 'Beta'. Stocks with 'Beta' close to 1 (Unity) move in the same proportion as the Index. Thus if Index moves up by say 2% then RIL may also move up by 2%.
In general, a) mid and small-cap stocks are more volatile and command higher Beta values compared to Large-cap stocks, and b) fundamentally stronger companies command lower Beta values compared to weaker ones. Thus if you are invested in fundamentally sound company and even if it is small or midcap then it should not have a Beta value of more than 1.5 or at the most 2. BSE Midcap index has fallen 25% and BSE Smallcap index has fallen 35% from the peak in Jan 2018. Assuming an average decline of 30% in mid/small cap index and limiting the volatility to two times index (i.e. Beta=2). Thus any stock which has lost more than 60% (two times the index loss) from peak made during last 20 months needs a very intensive investigation.
The above measures are simple and can certainly help you in avoiding/exiting likely losers.
By A K Asnani
Author - Way To Billionaire
(above techniques worked very well for me with moderate risk-return profile. Same may or may not hold good for all kind of investors)