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Is it Advisable to Buy 52-Week Low Shares for a Long-Term Perspective?
Is it Advisable to Buy 52-Week Low Shares for a Long-Term Perspective?
Buying shares at their 52-week low can be a strategic approach for long-term investors. However, this decision comes with both potential advantages and risks. In this article, we will explore the benefits and drawbacks, helping you make an informed choice before investing.
Advantages of Buying 52-Week Low Shares
Value Investing
Shares at their 52-week low may indicate that a company's stock is undervalued. If the fundamentals of the company remain strong, this presents a buying opportunity. By purchasing at a lower price, you have the potential to see substantial gains when the stock recovers.
Recovery Potential
Temporary factors such as market sentiment, industry challenges, or short-term financial issues can cause a stock to fall to new lows. If these factors are temporary, the stock may rebound over time, resulting in significant gains.
Marginal of Safety
This strategy can offer a margin of safety. Purchasing at a lower price can reduce the risk of loss if the stock does not perform as expected. This is akin to investing in a safer asset, providing you with a buffer during uncertain times.
Risks to Consider
Underlying Issues
Shares at a 52-week low may indicate fundamental problems such as declining sales, poor management, or industry challenges. It is crucial to thoroughly investigate the reasons behind the stock's decline to avoid making a poor investment decision.
Market Sentiment
Sometimes, stocks reach lows due to broader market trends or sentiment rather than company-specific issues. This can lead to prolonged periods of underperformance, making it challenging to predict when the stock may recover.
Timing the Market
Just because a stock is at a 52-week low does not guarantee that it cannot go lower. Timing the market can be challenging, and investors may miss out on potential gains or incur losses if the timing is off.
Conclusion
Investing in stocks at their 52-week low can be part of a long-term strategy, but thorough research is essential. Analyze the company's fundamentals, industry conditions, and market trends before making a decision. Additionally, diversifying your portfolio and considering your risk tolerance are important aspects of long-term investing.
Examples and Insights
When a fundamentally strong share falls due to external issues, it presents an opportunity to buy. This is similar to buying gold at a time when the market price is low. Here are some examples:
SPICEJET Example (2015)
SPICEJET, a travel company, traded at Rs20 in 2015. After purchasing a small quantity, the stock reached Rs150 due to improvement in the airline industry. However, the industry remains loss-making, as the significant portion of revenue goes towards aviation fuel (ATF) and oil, commodities prone to price fluctuations. Therefore, if your investment doubles or triples, it may be best to exit the stock.
NMDC Example
NMDC, a mining company, traded at Rs70 and later rose to Rs160. Although it took three years to reach this price, the company consistently paid attractive dividends each year. This example shows that some cyclical stocks can provide strong returns over time if selected carefully.
Shares with Past 52-Week Low Returns
The following companies have historically provided handsome returns when bought at their 52-week low: BIOCON, SBI, IRCTC, INFOSYS, ICICI BANK, HUL, and EICHER MOTORS. While it is impossible to invest in every stock, choosing the best one from your favourite industry and understanding the reasons behind its low price can help make informed decisions.