Paisa Wise Rupee Foolish

Many stocks are trading at a low price but one should be wary of buying them.

- Jitendra Kumar Gupta

To catch a falling knife’ is a popular market saying and is thrown about when one wants to buy into a stock that has plummeted. The underlying belief being that it will bottom out and reverse trend soon. In the current scenario, there are a lot of stocks that have lost 30-50% of their market cap and seem attractive when compared to their glory days. The table Bottom-less is representative of the truism that low price does not necessarily equate value.

Nilesh Shah, CEO, Envision Capital Management explains. “Price is just a reference point. It says nothing about the intrinsic value of a business or how much a business is worth. So, a low price does not mean a business has huge value. When a stock falls, one needs to figure out if the fall is temporary or due to a permanent impairment in the business,” he says.

Take, for instance, REI Agro, which was once the world’s largest rice processing company. The promoters held 47% while FIIs held in excess of over 40% in 2013, when the stock was quoting at ₹10. While that might have seemed low-priced, the stock has continued  its slide and now trades at ₹0.50 after a fraud allegation against the promoters. Lanco Infratech is another example. It traded at ₹75 in 2011 and had a market cap of over ₹20,000 crore on an equity of ₹4,600 crore. However, losses incurred due to high interest cost have knocked its price down to an all-time low of ₹4.

IN DEBT WE TRUST