Look at valuation of a stock, not price

Buying a stock cheap is not necessarily value investing. Look at a number of other factors as well

Is it an opportunity or a risk? It is a question many direct stock investors would be asking themselves when they see prices of good companies hitting 52-week lows.

In the past couple of months, a large number of companies have hit these lows. As many as 101 stocks, or 50 per cent stocks in the BSE-200, have hit such lows since February. These include Tata Consultancy Services, Lupin, Colgate-Palmolive, Oil India, Castrol India and other marquee companies. But, should you jump to buy these?

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Says investment advisor Arun Kejriwal: “When stocks fall that sharply, investors wonder that whether it is attractive or not. Sometimes, things are go right but one can also get stuck.”

Nilesh Shah, managing director, Kotak Securities believes that each stock has to be valued on the basis on valuation and not only on the basis of 52-week low or high. “Many times, a fairly-valued 52-week high stock is better than an expensively valued 52-week low stock. It is important to evaluate fundamentals of stocks than its price movement,” he says, adding that it is not necessary that a stock on a 52-week high is expensive or vice-versa.

However, there are investors who make decisions based on anchoring bias. Anchoring bias is relying too heavily on the very first bit of information while making decisions. So, information like 52-week high or low becomes a point to exit or enter stocks, which might either be too expensive or fundamentals aren’t very strong. It is much like buying something in a sale which you might not need or use.

Market experts believe that direct stock investors need to focus on a number of things such as fundamentals of the company, the business, quality of management, growth potential, etc. Often, such falls are caused by a genuine problem that is likely to continue for some more time. And investors, in their pursuit of bargain hunting, might land up into value traps.

According to Kejriwal, investors need to be clear about a few things. If only a couple of stocks have fallen to 52-week lows, they need to find a reason and see whether it is a good buying opportunity. Such good companies can be held for the medium to long term.

However, when a large number of stocks fall at the same time, there are expectations that there will be some buyback. But, any investor buying into this fall should be clear that they will exit on the bounce back because otherwise there are chances of getting stuck.

Investors can also use this as a strategy, but then it has to be a medium-to-long-term one. “Such investors cannot just buy once and stop. If the stock falls again, they should buy more. This should be used more as an investment style,” adds Kejriwal. This will help them average out costs and give a substantial boost when things turnaround.