Be fearful when others are greedy, and greedy when others are fearful.
Given the dismal performance of the equity market, it may be ironical but experts feel that 2019 could be the golden year for investments. There are many stocks that are trading at attractive valuations and can turn out to be multi-baggers in years to come.
In recent years, the number of stocks that gave multi-bagger returns has come down. The number of stocks that rose more than 100 percent tanked from 611 in 2017 to 36 in 2019. The number of stocks that gave more than 500 percent return fell from 15 in 2017 to 1 in 2019. And, the number of stocks that rose more than 1,000 percent also reduced from 4 in 2017 to 1 in 2019.
Warren Buffett once said, “Be fearful when others are greedy, and greedy when others are fearful.” Most experts suggest this is the time to turn greedy. Market valuations, at an aggregate level, are still not cheap, however many stocks do look attractive.
We think that the current phase of 'risk-off' is likely to last for another quarter. What we are going through is a meaningful correction. It is hard to pick a bottom, but typically buying stocks during these corrections tend to be the right choice.
“After the trough in the last three corrections, equities were up 28 percent one year after the date of the trough. Midcaps have done better, up 39 percent during similar periods. Our opinion is that this would be a good time to buy stocks with an investment horizon of one year or longer.
The investor sentiment has turned sour in 2019 thanks to fears of a slowdown in the economy. Trade war tensions between the US and China is not helping either.
For the sentiment to improve, private capex has to pick up. The Reserve Bank of India reduced rates by 35 bps earlier in August to kick start the economy but the results are still some time away. Hence, investment should be made with a time horizon of 3-4 years.
Given a three to five-year time horizon, stock nibbling won’t be such a bad idea, especially if done in a staggered manner.
What are the parameters to look for in a multi-bagger?
Finding a multi-bagger stock is tough. Investors should note that stocks that turn out to be multi-baggers could be due to economic factors, industry growth trends, regulatory changes, and fundamentals of the company.
Except the fundamentals of the company, all other factors are mostly unpredictable. Hence, the focus should be on the fundamentals.
Stocks which end up being multi-baggers would be companies 1) that are facing difficulties, trade at low valuations, and are likely to experience a turnaround, and 2) businesses that are in sectors which are experiencing extremely strong growth.
In the current market environment, we can find companies that are experiencing difficulties, for eg. auto and capital goods. Multibagger stocks would mostly be from the mid and small-cap space that are likely to outperform once the markets are in 'risk-on mode
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