How To Spot Promising Beaten-Down Stocks?

How to spot promising beaten-down stocks. Plus: 10 stocks screaming for your attention right now.

- Karthik Anand Vijay & Udhayaprakash

It's common investing wisdom that you should buy good companies when their stock prices are depressed due to some temporary crisis. The problem is that you know whether it's really a 'good' company only in hindsight, i.e., how does one know if a company would be able to successfully emerge out of a crisis? We discuss this in detail in this cover feature. Not just this, we also bring to you 10 quality stocks that have fallen lately. We discuss why these companies deserve your attention and why we think they can tide over their difficult phase. But let's start with an insightful study on drawdowns in quality stocks and how they help you create enormous wealth.

Dynamics of drawdowns

All stocks witness rough phases during their lifetime. Investing in quality stocks during such periods can be highly rewarding, reveals our analysis.

All companies (and their stocks) go through ups and downs. It could be their own making (such as poor execution of a project or expanding outside their circle of competence, etc.) or it could be an external factor (for instance, the global financial crisis of 2007-2008, the COVID meltdown of March-April 2020, etc.).

At such moments, the share price takes a nosedive. Rather than panicking at the sight of your investments losing value, the right approach is to invest in quality companies. These instances can present great entry points for a long-term investor. As you will find, even the best-of-breed businesses face drawdowns (both significantly and frequently).

To demonstrate that, we looked at the journey of the wealth creators of the past 20 years. We applied the following filters to get the list of companies:

• Minimum market cap of 500 crore (to remove micro caps) and a 20-year trading history. This filter gave us 631 companies.