Beat The Beta: Worst 5 Stocks of 2008

This is the first post in a 5 part series bringing to you the Worst 5 stocks of 2008.

Between 8th January 2008 and 10 October 2008, the key global indices on an average fell by 41% from their highs. The Sensex tanked to 10240 from a high of 21207. Every investor in the market bled including the ones who had remained invested for the past 6 years. But there were a few who happened to pay a little more than the others. Out of this lot, a majority consisted of investors who had picked high beta stocks and had invested in sectors such as Real Estate and IT.

So what's the big deal with Beta? During the Sensex crash of 2008, 91 of the worst hit stocks had all a beta of greater than 1.4 and combined, they constituted over 92% of the total market cap of BSE. Of these 91, the top 10 had four stocks from the Anil Dhirubhai Ambani Group. But I am here to talk about the worst of them all.

Had you invested in this stock in late 2007 or early 2008, then by the middle of October 2008, you would have lost over 92% of your investment. It was the worst hit stock of the 2008 crash and the one also with the highest beta of 2.08

HDIL (Housing Development and Infrastructure Limited) was the worst pick of 2008. A reduction in CRR meant that the cost of funding by the company kept increasing and this ate into the profitability. Rising inflation and interest cost meant that their current projects were unsaleable. The company was witnessing such a severe cash crunch that it borrowed money at a shocking 36-48% from the financiers. Worst of all, the company has a promoter stake of over 60% and still could not prevent the blood fest. I hope you did not buy this stock...

Beta at times of severe correction can be the worst measure to pick a stock. A stock with high beta will be the first one to be punished when a correction happens. So decrease dependence on beta as a decision making tool while picking up a stock.

Beta Goes "BOOM"

It is a very common practice to analyze stocks based on their Beta level amongst other key performance indicators. Beta refers to the volatility of the stock. An ideal Beta would be 1. So if a stock has a beta greater than 1 then it would be a riskier investment but consequently, returns if any would also be higher. The inverse is said to be true for a stock with a beta of less than 1.
But that’s where the theory meets reality and reality-check it indeed is, big-time. All the Bull Run coaxed investors who entered the markets in early 2003 when the so called bull run started, thought and hoped that their investments would work based on fundamentals and their analysis and research would give them an edge. With time they realized that speculation had a much stronger hold on the Indian stock exchanges than they had imagined.

Logic gave way to Frenzy Buying and Sheep Calls and soon enough most investors found themselves sitting on a pile of cash. This was good enough even for Private Equity investors when the Sexsex was 21,200 levels. But since January this year, most stocks have hit their 52 week lows. The market has been indifferent in this regard to stocks irrespective of a high or a low beta. All 500 stocks listed on the BSE have witnesses at least 25% fall, 35 amongst them hit with 75% or more. The market has fallen by more than 40% since its record highs. These are unchartered waters for the optimistic Indian Investor.

Understandably enough, it’s not rare to hear investment advisors talk about a bear run and advising their clients to stay away from the markets for a while. All of a sudden, the meager looking Gilt Funds and Bonds seem to be the most attractive investment options.

What is hard to understand is that the same people who were willing to buy a UB Holding or an ICICI stock at a 70% premium a year back are not willing to invest in the same stocks at throw away prices. Take Gabriel Industries for example. The stock had an earth shattering volume when it was trading at Rs 22 a few months back. Today the same stock is at Rs 13 odd which is a 41% fall in the price, but there are hardly any buyers. I am not sure that a bear run has started yet. What has sunk in is, a fear neither chance nor fundamentals working anymore. Investors realize now that with such inflated prices it was only a matter of time when the fundamentals would zoom out of the window and now most of them are scared because they don’t know where the bottom lies. Personally, I believe that this is the perfect time to gather and gather cheap buys at throw away prices. The Hindalcos and the HDFCs at a 40% + discount. The condition obviously remains that the investment should have a long term horizon.