‘Phoenixes’ mauled by bears may rise sharply in a year’s time, hints study

It pays to stick to quality companies that tumble sharply in a bear market. A study done by ICICI Securities on the previous three major bear markets of 1992, 2000 and 2008, when the benchmark indices fell over 40-50% from their respective highs, shows quality stocks that fell over 70% from life-time highs have generated strong returns.

Sun Pharma, Mahindra & Mahindra, Hindustan Petroleum (HPCL), Tata Motors, Cummins India, Federal Bank and Tata Communications are among the stocks that have tumbled over 70% from their record highs.

“We believe there are several such phoenixes that have corrected over 70% from their life-time highs such as Sun Pharma, Mahindra & Mahindra, Hindustan Petroleum, Tata Motors, Cummins India, Federal Bank and Tata Communications — [these] are available at huge bargains relative to their business fundamentals,” said Dharmesh Shah, head technical, ICICI Securities. “Even from a technical analysis setup, chart patterns of such companies indicate a value area emerging, suggesting buying such stocks to reap handsome gains over a one-year period.”

For instance, ACC, after correcting 85% from record high till July 1993, gave a return of 149% in subsequent one year. Infosys, after declining 84% till April 2003, surged 114% in one year. Larsen & Toubro, which dropped 77% till March 2009, gave a return of 181% in the subsequent year.

Analysts said investors could construct a long-term portfolio of quality stocks in a staggered manner over the next one year.

“Though the near-term outlook for stock market may be hazy, the risk-reward turns extremely favourable for investors as market has already priced in extreme pessimistic scenarios,” said Pankaj Pandey, head of research, ICICI Direct. “Also, as the anxiety around the event settles down and a new bull phase eventually commences, these companies return abnormally high alpha for investors.”