Skip to main content

What Not to Do When Your Blue Chip Stocks Crash


   Investors buy blue-chip stocks with twin objectives — they want to ride the India growth story and prefer the lower price volatility they offer. However, these may not always hold true. How else would you explain the tumbling down of some blue chips by 10% or even more if you go by some recent crashes?

For example, in the past year we have seen this happen to stocks like Maruti, LIC Housing, Hero Honda and more recently to Infosys. The reasons behind the mighty fall could be as varied as corporate governance, poor performance in a quarter or management restructuring, among other things. But the first question that arises in the mind of a retail investor is: "What should I do?"

HOW THE MIGHTY FALL

The situations we are talking about are tricky. To start with, there is no one reason or any corelation for the fall in price of the blue-chip stocks mentioned above. Every story is a different case and needs to be viewed separately. Each stock has to be looked upon on a case-to-case basis. One could be fundamental — a change in the business model, or a lower demand for the product. The second reason could be classified as external reasons, which need not be related to the business.


Look at these three recent examples: On November 24, 2010, LIC Housing Finance lost 22.4% after the news of the 'bribes for loans' scam broke and its CEO was arrested. There was fear that it would be difficult for the company to raise funds at reasonable prices. For a housing finance company, the cost of funds matters the most and any adverse impact on that front is detrimental to future earnings. The stock, a blue chip, disappeared from portfolios of domestic funds as well as foreign institutional investors in no time.


On July 26, 2010, Maruti Suzuki fell 14% on the back of poor quarterly numbers due to high royalty payments and rising input costs. "Had Suzuki increased the dividend payout of the company, investors would not have objected it. But taking home money in the form of royalty payments, was perceived to be a non-minority shareholder-friendly move by markets," explains an analyst with a life insurance company. Hero Honda lost 9% during the day when the stake sale news by Honda Japan hit the market, though it recovered to close at a loss of 5.4% towards the end of trading on December 15, 2010. Recently, the Infosys stock fell from . 3,306 on April 15 to . 2,881, a fall of 14.75% in a span of three trading sessions on weak performance, muted guidance and management restructuring.

AFTERMATH OF THE FALL

It would be interesting to note what happened to these stocks after the fall. A month later, things were back to normal for LIC Housing Finance. A research note from IIFL recommended a buy on the stock at . 182, with a target price of . 237, as the company had kept its full-year growth guidance at 30% unchanged. One way to look at the situation would be to check if the business is affected or not.

The fate of Infosys is no different either. A number of broking houses continue to give buy and hold recommendation on the stock. For instance, PINC recommends a buy on the stock, with a target price of . 3,690. When we talk of blue-chip companies, we must realise that their valuations are rich and the margin of error is low. Infosys Technologies was quoting at price-to-earnings multiple (P/E) of 30.9 before the results were declared, as compared to the broader market which was quoting at a P/E of 21. Clearly, the valuations were high, which indicates that analysts expect an above-average growth rate for the company. If it does not deliver on those expectations, it is bound to be punished by the markets. So in the case of Infosys, since the growth guidance was a mere 6%, it was bound to disappoint the market and, hence the stock fell.


Maruti Suzuki also recovered the lost ground after the management issued clarification on royalty payments. The story of Hero Honda was no different. The exit of Honda, Japan was seen as a reason by some investors to dump the stock. However, some investors believed in the ability of the Hero Group to take the business to the next level without Honda as a partner. Naturally, the stock bounced back in the later part of the trade.

THE ACTION PLAN

Clearly, investors may come across such cases now and then in the market. As one can see from the above instances, the fall need not be the end in most cases. Naturally, that is why it is important to find out the reasons behind the fall before taking a sell call. As for the age-old strategy of buying the stock during the plunge, experts say one should tread with caution and pay attention to valuations. Something which is in favour of these stocks is that they have managements which have a long, proven track record, something that is given a lot of weightage by equity investors. If the management is proactive and the damage is a one-off situation it would work in favour of investors. If investors are confident of buying these stocks, they could buy them on a piecemeal basis. He explains that the uncertainty surrounding a stock will not be resolved in a day or two. At times, it could persist for quite some time. That is why buying over a period of time is advisable. Also, such stocks could take more time to rebound, as investors will come back only when they have confidence again. Hence, it may not be worth a gamble if you are a short-term investor. Since they are blue chips and among the top players in their respective industries, most of these stocks merit attention from a long-term perspective. When the uncertainties fade out, the returns could be great.

 

Popular posts from this blog

What is Electronic Clearing Service (ECS)?

  As the name suggests, it's an electronic process through which money can be transferred from one bank account to another. According to RBI, this mode is usually used for regular payments and receipts, like distribution of dividend, interest, salary, pension etc. This mode is also used for collection of bills for telephone, electricity, water, various types of taxes, payment of EMIs , investments in mutual funds , payment of insurance premium etc. There are two types of ECS , like most other banking transactions, ECS credit and ECS debit. An ECS credit is used by a bank account holder , usually a large company or an institution for services like payment of dividend, in terest, salary, pension etc. If your mutual fund pays you dividend to your bank account, of all probability it is being paid through ECS credit.ECS debit, on the other hand, is used when a company or an institution is getting money from a large number of people. For example if you are investing in a mutual fund sc...

WEALTH TAX

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300 WEALTH TAX   WHAT CONSTITUTES WEALTH? For wealth tax purposes, "wealth" means property , urban land, car, jewellery , yacht, boat, aircraft and cash in hand in excess of Rs 50,000. CAUTION POINT | Do not think you will have an easy escape from wealth tax by transferring your `wealth' without consideration to your spouse or minor child. Such assets will also be considered as your wealth. HOW TO DETERMINE YOUR TAXABLE WEALTH Add the taxable value of the above assets (computed as per the detailed rules for valuation) owned by you as on March 31 (for FY 2014-15, it will be March 31, 2015). In case you sold your car during the year, it will not be taxable wealth. Deduct loans if any obtained by you to acquire any of the taxable assets from the value of gross tax out for at least 300 days in a...

Equity Savings Fund

Invest Equity Savings Fund Online   The best part about these funds is that they are subject to equity fund taxation and at the same time are structured like MIP like funds . This new category, equity savings funds , offer a little of everything. They allocate money to equities & equity related instruments, and fixed income. They aim to generate returns by diversification. Such funds invest in fixed income and arbitrage to protect the investors from short term volatility and equity for capital gains. The best part of these funds is that they are subject to equity fund taxation and at the same time are structured like MIP funds.   MIP funds however are subject to debt fund taxation. Investors Equity savings funds are suitable for the following: First time investors who seek partial exposure to equity with less volatility and greater stability Investors seeking moderate capital appreciation with relatively lower risk Those wh...

How to Pick Top Performing Mutual Fund Schemes

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   How to Pick Performing Schemes  Funds that continue to stay in the top grade of performance over longer periods are the ones to bet on, advise investment experts   The mutual fund performance charts of the past few months make for an impressive reading. Funds across all categories boast of stellar returns. Sample this: The mid and small cap category has averaged 77 percent return over the past 12 months, with the best fund delivering a staggering 120 percent. The tax-saving funds also average an impressive 51 percent, including a fund which has soared 92 percent. Many of the table-toppers are funds of proven quality and track record. However, there are also schemes that are not that well-known. Some of these have rarely made it to the performance charts in the past, yet, of late, they bo...

8% Government of India Bonds quick guide

For those seeking comfort in safety of returns, the Government of India issued 8% savings bond once again comes to the fore. First launched in 2003, these bonds are issued by the government with a maturity of 6 years. The bonds are available at all times with specified distributors through whom you can apply to invest in them. Here is a quick guide to what the bond offers and its features to ascertain to check for suitability. What are Government of India bonds Government of India bonds are like any other government bonds with specified rate of interest. The rate is fixed at 8% per annum paid half yearly, or you can opt for cumulative payment of interest at the end of the tenure. You can buy these bonds from State Bank of India and its associates, other nationalized banks and some private sector banks such as HDFC Bank Ltd and ICICI Bank Ltd, among others. The bonds can be bought from the offices of Stock Holding Corporation of India as well. They are available in physical form onl...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now