Should One Invest In Beaten-down Stocks?

There is nothing more satisfying than watching the global and Asian markets run with higher highs and higher lows spree. Moreover, no one could deny the fact that the markets of major economies are reviving from the surging doldrums of negotiation war between the US and China, deteriorating growth outlook, Brexit deal between European Union and the United Kingdom to attain the complete autonomy as the long-term stories of these economies are rock solid.

Well, our domestic economy is not lagging behind any other major economy as the recent curtailment in corporate taxes, strategic disinvestment to curb the widening fiscal deficit and adaptation of necessary policies to entice more investment from foreign tycoons and institutions are providing a lot of opportunities for investors to capitalise on. But, things got tangled on the juncture of extraction of stocks that should find a place in our portfolio.

It has always been a controversial issue on injecting those stocks that have been beaten down in the recent times led by the issues of corporate governance, stocks that are going through structural change, defaults in the payments of their fixed interest obligations and in majority.  However, there are various grounds on the basis of which, we advise investors to refrain themselves from getting into troublesome stocks. In order to support the statement, here are the following reasons.

Slippages in earnings growth 

Market veterans have always been the followers of increasing Compounded Annual Growth Rate (CAGR) of the companies to consider them before channelising their funds and give low attention to the dividend policies and unexpected bounces to make easy bucks. Moreover, the companies whose stocks have recently faced the beating usually discloses poor earnings due to unhealthy financials on result window, avoiding the eyes of big financial institutions.

Structural change in operations 

The companies that went through structural change in their operations led by changes in government policies of a particular economy, modernisation of the technologies on which the company has failed to capitalise on, no further demand of their product in the economy.  

Degrading credibility 

The impulse breakdown of stocks to south degrades the credibility of these companies as it makes difficult for these firms to raise capital from the market or raise the cost of acquisition of the funds that dampens the operations of the company.

Issues beyond the fundamentals 

It is said that the cyclical operations of business get curbed in accordance with the change in the overall economy but the issues of corporate governance due to lack of transparency, ethical violations with the stakeholders or fading confidence of promoters in the company raise questions over their long-term sustenance.

Old school valuation practitioners have always been in favor of investing in those stocks that are available to them at throw away prices, neglecting the issues the company is going through or the future prospects of their current product portfolio as they have the capability to provide decent returns in a short span of time. But the characteristic of instability, higher standard deviation and lack of trust from the general public keeps these stocks on the edge of draw-down. So, we are not in favor of investing in beaten down stocks rather than the investors should add good fundamental stocks on every dip.

The author is the founder and CEO of Advisorymandi