Does opportunity buying work? | Value Research Buying distressed stocks may not always yield good returns

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Does opportunity buying work?

Buying distressed stocks may not always yield good returns

Many stock investors drool at the sight of big falls in the prices of good companies due to some negative news. They take such falls as a great opportunity to buy into quality stocks, or to profit from a rebound in the stock price. We wanted to check if buying a stock after a significant fall in its price is indeed rewarding or not. In our study we took the Sensex companies and studied falls in their prices over the last five years. The steepest fall in a day was considered a 'crash'. For instance, BHEL fell 19 per cent on August 05, 2013, due to poor Q1 results, which saw its profit almost halving on a year-on-year basis. Infosys fell 21 per cent on April 12,2014, due to bleak guidance by the management and poor Q4 results.

In our study, we then compared the returns given by the companies as of April 30, 2015, from the date of crash. We also compared the returns with the returns given by the Sensex in the same period.

What we found is intriguing and contrary to the general perception: Investing during steep falls did not always give handsome returns. The results were a mixed bag. Half the time the returns were better than the benchmark's; half the time, they were not.

Moral of the story: Don't chase stocks that have seen a crash blindly. Buying stocks that have seen a huge fall in their prices is no surefire formula for making money. Research well before buying a stock. Take advantage of a stock fall only when it's a good company that has suffered a temporary misfortune.

Where opportunity buying worked

CompanyDate of crash% of crashStock Return (%)Sensex Return (%)
Axis Bank03/09/2013-9.27105.1426.37
Coal India17/01/2014-9.8934.1421.43
Dr. Reddys Lab19/05/2014-5.2245.1812.81
HDFC Bank27/08/2013-8.0441.1327.08
ICICI Bank16/07/2013-5.6125.9819
Maruti Suzuki19/07/2012-8.7454.8117.64
Sun Pharma19/03/2012-7.0941.3715.71
Tata Motors30/05/2012-11.821.3819

Where opportunity buying didn't work

CompanyDate of crash% of crashStock Return (%)Sensex Return (%)
Bajaj Auto02/01/2012-7.415.2118.28
Bharti Airtel08/08/2012-6.616.8717.25
Hero MotoCorp03/05/2012-7.696.4716.63
Hindalco Industries25/08/2014-9.56-30.646.28
Tata Power06/08/2013-14.763.9823.38
Tata Steel27/02/2012-7.03-9.8515.07

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