Falling Knife Stock-A case study approach!
Telah dikemas kini
Introduction:-
We have seen an amazing bull run in global markets including our Indian markets in the past 3 years. Many investors have been able to gain multibagger returns from this bull run.
However, we all must understand that like every coin has 2 sides, every bull run has few stocks which are either under performing(like our beloved HDFC Bank) or are part of falling knife category.
A falling knife is a term used when a security, such as a stock, quickly drops in price. During such instances, investors are recommended to wait for the security to reach its lowest point before buying back in. (Source: CFI)
The reason for falling knife could be change of fundamentals, weak results, future degrowth prediction or anything beyond our understanding.
And it is important to identify such stocks . Investors try to enter such stocks thinking they have caught the bottom just to keep funds locked in the stock for longer times. Hence,it is beneficial to stay away from them until a reversal pattern is seen with good volumes in weekly time frame.
Case study:-
Let's discuss one such stock from the footwear category, Campus Activewear.
Company is one of India’s largest sports and athleisure footwear brands in terms of value and volume. Good return ratios(ROE,ROCE) above 20%, high sales growth of 32% in last 3 years,slightly expensive valuation but hardly anything so wrong in fundamentals from my understanding.
Being a techno fundamental investor, I look at lot of things from fundamental as well as technical perspective before entering.
So, from a technical view, just have a look at stock's chart. In late 2022, stock was around 620 levels and now stock is trading near 270 levels which is more than 50% of wealth destroyed. A proper example of Falling Knife whose bottom is still not made. There must be some unlucky investor who is holding the stock from the tops expecting a reversal but what he has missed is the amazing bull run of Nifty from 18800 to 22000 in this last 10 months. And that is a huge miss.
Learnings:-
#1:-If you are an investor with have limited capital, it is better to have a Stoploss even for your investment stocks in a bull run.
Remember, Even Warren Buffet owned Berkshire Hathway booked loss in Paytm
#2:-If you are an investor with good amount of free capital, just forget! Don't have FOMO. Cash equity securities are beautiful and unpredictable. We might see this stock above 1000rs levels or below 100rs in the next 5 years.
Remember, even The best of best investors owned few stocks which failed miserably.
#3:- For an investor trying now to hunt a bottoming/reversal opportunity,do wait for stock to sustain a weekly closing above 320 which is a strong resistance.
Remember, not even promoters can catch exact tops and bottoms, so you also should not try to!
Conclusion:
I would say that if you trust your analysis and company's fundamentals, you should not listen to outside crowd. However, A falling knife can act as a dagger in your portfolio .
A smart investor is one understands what company's business is as well as what the stock's chart is trying to say.
We have seen an amazing bull run in global markets including our Indian markets in the past 3 years. Many investors have been able to gain multibagger returns from this bull run.
However, we all must understand that like every coin has 2 sides, every bull run has few stocks which are either under performing(like our beloved HDFC Bank) or are part of falling knife category.
A falling knife is a term used when a security, such as a stock, quickly drops in price. During such instances, investors are recommended to wait for the security to reach its lowest point before buying back in. (Source: CFI)
The reason for falling knife could be change of fundamentals, weak results, future degrowth prediction or anything beyond our understanding.
And it is important to identify such stocks . Investors try to enter such stocks thinking they have caught the bottom just to keep funds locked in the stock for longer times. Hence,it is beneficial to stay away from them until a reversal pattern is seen with good volumes in weekly time frame.
Case study:-
Let's discuss one such stock from the footwear category, Campus Activewear.
Company is one of India’s largest sports and athleisure footwear brands in terms of value and volume. Good return ratios(ROE,ROCE) above 20%, high sales growth of 32% in last 3 years,slightly expensive valuation but hardly anything so wrong in fundamentals from my understanding.
Being a techno fundamental investor, I look at lot of things from fundamental as well as technical perspective before entering.
So, from a technical view, just have a look at stock's chart. In late 2022, stock was around 620 levels and now stock is trading near 270 levels which is more than 50% of wealth destroyed. A proper example of Falling Knife whose bottom is still not made. There must be some unlucky investor who is holding the stock from the tops expecting a reversal but what he has missed is the amazing bull run of Nifty from 18800 to 22000 in this last 10 months. And that is a huge miss.
Learnings:-
#1:-If you are an investor with have limited capital, it is better to have a Stoploss even for your investment stocks in a bull run.
Remember, Even Warren Buffet owned Berkshire Hathway booked loss in Paytm
#2:-If you are an investor with good amount of free capital, just forget! Don't have FOMO. Cash equity securities are beautiful and unpredictable. We might see this stock above 1000rs levels or below 100rs in the next 5 years.
Remember, even The best of best investors owned few stocks which failed miserably.
#3:- For an investor trying now to hunt a bottoming/reversal opportunity,do wait for stock to sustain a weekly closing above 320 which is a strong resistance.
Remember, not even promoters can catch exact tops and bottoms, so you also should not try to!
Conclusion:
I would say that if you trust your analysis and company's fundamentals, you should not listen to outside crowd. However, A falling knife can act as a dagger in your portfolio .
A smart investor is one understands what company's business is as well as what the stock's chart is trying to say.
Nota
If you like such content, please like and comment. I have a list of few stocks which are under falling knife category according to me which I would post 1 every week if I get good response on this.
Penafian
Maklumat dan penerbitan adalah tidak dimaksudkan untuk menjadi, dan tidak membentuk, nasihat untuk kewangan, pelaburan, perdagangan dan jenis-jenis lain atau cadangan yang dibekalkan atau disahkan oleh TradingView. Baca dengan lebih lanjut di Terma Penggunaan.