Should you pick stocks at their 52 week low? Catching a Falling Knife or Value Investing?
This month has been the worst October for the Indian stock market since the 2008 financial crisis. The Nifty is down 9 percent from its open of 110008.3 on October 1st. Stocks which have hit their 52-week low on NSE include Maruti, Eicher Motors, DHFL, InterGlobe Aviation, Apollo Tyres, Central Bank of India, Dish TV, Ultratech Cement, Bharti Airtel, and others.
Would you buy a pair of shoes just because they were on sale? You would take into account the quality of the shoes. If you could determine the shoes wouldn’t last a month, would you still indulge in the discount? The market price does not determine if a stock is cheap or expensive. Buying a stock solely because it is at a 52-week low is like indulging in the shoe purchase just because you were getting a discount.
The focus should be on fundamentals and valuations, not price. If there is enough gap in the intrinsic value and current price, along with a margin of safety, we should consider investing. Buying at 52-week lows should not be confused with value investing. A stock at 52-week low could be a falling knife. If you try to catch it, you may get sliced.
“Buying stocks around the 52-week lows is generally a bad strategy to follow as stocks are inherently affected by momentum. A stock at 52-week low is generally trending lower and the trend will most likely continue in the near future. It’s prudent to look at the size of the company. Smallcap and midcap stocks are best avoided near their 52-week lows. Largecap stocks, part of the Nifty 50 can be looked at” says Nikhil Kamath, co-founder, Zerodha.
October has been a very volatile month with the Volatility Index (VIX) in the 18–20 level range. November would be a politically charged month with three states going to polls and RBI could hike rates in their December meet to keep a check on Inflation and curb the sharp depreciation in currency. Thereby, we can expect high volatility trends in the coming month too. Volatility will have to cool down for Bulls to take control again.
