An investor was recently narrating how he purchased the stock of Eros International, after the stock fell from Rs 600, to a 52-week low of Rs 252.
He thought that it was a good time, as the stock has hit a 52-week low and had fallen substantially from levels of Rs 600. After his purchase the stock dipped even further and is now trading at Rs 164. It hit a 52-week low of Rs 128.
The problem is that you really do not know, if a stock can dip even further from its 52-week low. It can keep hitting fresh 52-week lows.
Again, you have to look at fundamentals and the news flow that a stock attracts. For example, in the case of Eros there were allegations that the accounts were fudged.
We are not sure of that, though what we do know is that once there are concerns over accounting standards, a stock can take a severe beating.
There are many such endless, examples, where investors have tried to purchase stocks, thinking that they are cheap, only to realize they have become junk. Classic examples are the erstwhile Satyam Computers and Pentamedia Graphics.
Examining the fundamentals is very important?
Some companies are hit by temporary problems, which pushes their share price to a 52-week low. If the company is fundamentally sound, you can go ahead and buy these stocks. For example, there may be a US FDA ban on a pharma company. Of course, the company can work towards getting the ban lifted by taking appropriate measures.
If you feel there is value in the stock, you should go ahead and buy the same. Today, banking stocks are hit by worries of non performing assets. If you believe that the non performing asset worries would be solved with the passage of time, it maybe a good time to buy these stocks.
So, you have to really examine, if the worries in a particular stocks is temporary or permanent. In the case of Satyam it was a huge problem.
If the newsflow in a stock changes the fundamentals, please avoid the stock. Or else, if you fell that the stock has reached a stage, where it now is value for money and the fundamentals are intact, go ahead and buy the stock.
Most technical analysts will never allow you to buy a stock that hits 52-week low. This is because it is a sign of weakness and they would never advise to catch a falling knife. They believe that unless there is a trend reversal, it is best to stay away from such stocks.