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Markets seem to have settled down after the sharp crash, thanks to developments in China. But now that the market are moving up from the bottom, investors feel left out.
The opportunity of bargain hunting during the panic might have been lost, but there are still many stocks that are available at a discount to the price of what they were trading a week back. The problem is in how to identify the good ones which will run up past its previous highs.
It is important to know that an investor needs nerves of steel to buy stocks when there is panic all across, especially when we are unsure of how low the market can fall. When the Sensex fell by over 1,600 points and followed it up by falling another 400 points, albeit on an intra-day basis, few would have had the confidence to buy stocks, even if they were sitting on idle cash.
But now that the dust has settled and the markets are still trading at a lower level than those in the previous week, one can look out for companies that are potential gainers.
There are various ways in which stocks can be identified post a sharp fall. Generally when an external event causes a fall, like the recent fall did, the old favourites tend to rise again. It is safer to bet on them. But the important point to note is the risk reward expectation. Low price should offer enough cushion such that even if the markets fall further, these stocks will not fall as much as the markets.
We look at five ways to identify stocks when the world is falling apart
1) Valuations: Cushions in stock picking can be in the form of valuations. After the fall many of the stocks, both frontline and mid-caps are trading at attractive valuations. Those stocks which are below their long term average or perhaps close to the lower band and are expected to post strong growth going forward will be ideal candidates.
2) Cash and Investment levels: Cash and investment levels of the company act as good cushion. In a sharp fall, many stocks approach valuations close to their level of holding of cash and investments. At such times, the market is giving a low valuation to its business. But smart money will start picking up stocks which are closer to their value of cash and investments, thus offering a good risk reward ratio.
3) Dividend yield: Dividend yield becomes attractive when stocks fall off in a hurry. Sharp falls have seen stocks offer close to risk free return dividend yields. These stocks are no brainers and are the first to be lapped up by prudent and watchful investors.
4) Beneficiaries in turmoil: Many investors prefer looking at stocks that are expected to benefit the most going forward. They use the fall in picking up stocks that are expected to gain from current fundamentals and developments in the foreseeable future. Broking firm Nomura feels that the easiest way to identify beneficiaries of such a market fall, is to look at companies which benefit from a fall in commodity prices or a lower rupee.
5) Relative strength: Finally look at the stocks that have held on despite the carnage in the market. Despite the fall there are stocks that have moved against the trend. Generally defensive stocks are the ones where investors flock to take cover; these are some stocks that are expected to gain even if the turmoil continues.
