Yes Bank Crisis |Catching a Falling Knife vs Bottom Fishing of Stocks
What Learnings retail investors should take from Yes Bank Crisis? Let do comparative analysis of catching a falling knife vs bottom fishing of stocks. Once again, retail investors fell prey and got trapped in their ‘value hunting’ as YES Bank shares eroded 85% of value on Friday, 6th March, 2020. The stock fell to their lowest levels after the Reserve Bank of India took over its board and imposed a month-long moratorium.
Learnings from Yes Bank Crisis
Yes Bank Crisis Explained
- The Reserve Bank of India (RBI) on imposed a moratorium on the private sector lender Yes Bank on March 5, 2020.
- RBI capped a withdrawal limit on deposits at Rs.50,000 for one month period, up to April 3, 2020. This withdrawal cap applies to both Current and Savings account.
- The RBI also superseded Yes Bank’s board and appointed Prashant Kumar, a former chief financial officer at SBI, as the bank’s administrator.
- Yes Bank’s total exposure to shadow lenders and developers – both caught up in a funding crunch since late 2018 – was 11.5% as of September, according to filings.
- Yes Bank had been seeking new capital since last year, to strengthen its ratios and to end the questions about its stability due to its exposure to shadow banks entangled in a prolonged crunch in the local credit market. That erupted with a series of defaults at Infrastructure Leasing & Financial Services (IL&FS) Limited in September 2018.
- RBI has been in constant touch with the Yes bank’s management to find ways to strengthen its balance sheet and liquidity.
- RBI even met a few private equity firms that were exploring opportunities for infusing capital into the bank, but finally lost its patience and seized control of the beleaguered financial institution.
What is Bottom Fishing?
- Bottom Fishing is an investment strategy in which investors seek out for stocks whose share prices have recently dropped.
- The stock is said to be undervalued, when its market price is less than intrinsic value of the stock.
- Investing in an undervalued stocks so as to maximize the potential returns from the investment.
- Bottom fishing is the act of trying to find the bottom of a stock. This is typically done with stocks that used to be at a higher price.
- For Example :
- Infosys Ltd stock used to be at Rs.750-800 and now it is trading down at Rs.730-740.
- If you are trying to bottom the fish stock you are trying to catch the bottom of it in order for purchasing it so that way it can continue moving higher or to the upside.
- Meaning in the end you are trying to get a really good deal on the stock or get a lowest price or get a really good bargain on that stock.
- Why Bottom Fishing Matters?
- It is clear that bottom fishing is an attractive short-term strategy for boosting portfolio value or for making a quick profit during periods of volatility in the market.
- However, bottom fishing can be risky since even the most experienced investors find it impossible to account for all factors that affect market prices.
- Also, it is not always possible to determine if a price decline results from investor behavior or from some fundamental change in the issuing company.
Examples of Bottom Fishing
- Infosys Ltd, Marico Ltd, Larsen & Toubro Ltd are some of the examples of bottom fishing.
- In case of such stocks the institutional holdings (both FII and DII) are rising consistently, which is one of the positive indicator for the stocks It shows the institutional investors are more confident about the future growth prospects of the company.
- For Marico Ltd, Institutional Holding is rising from 32.86% in Dec-2018 to 33.52% in Dec-19. Whereas, Retail Investors holding is falling From 7.83% in Dec-2018 to 6.88% in Dec-2019.
What is mean by Catching a Falling Knife?
- Falling knife is a category of Stocks which has undergone a rapid decline in share price in short amount of time.
- Catching a falling knife means buying a declining stock with a lot of downward momentum.
- The term Catching a falling knife describes the attempt to make up the losses on an equity you hold that has quickly lost a significant portion of its value by attempting to buy it at or near its low point, then holding on as it rises again, finally making up your losses
- “Don’t jump into a stock during a drop”. It can be extremely dangerous – just like trying to catch an actual falling knife.
Examples of Catching a Falling Knife
- Yes Bank, Dewan Housing Finance Ltd (DHFL), Kingfisher, Indiabulls Housing Finance are some of the stocks where retail investors have been trying to catch the falling knife.
- Retail Investors are itching to chase stocks that have been battered to substantially lower price levels.
- In many cases, unsuspecting retail investors have been buying the same stocks that smart institutional investors have been offloading.
- Retail investors are buying these stocks simply because the prices have fallen to unbelievably low levels.
- The investment rational here is that many of these stocks have been hammered down below their intrinsic values and thus they would bounce back strongly the moment the market finds its base.
- However, the problem is that these falling knife stocks mentioned above might never revisit their peak level again.
Yes Bank – Catching a Falling Knife
- The troubles of Yes Bank started emerging out post IL&FS crisis due to sharp deterioration in its asset quality on account of bad loans.
- In August 2018, the share price of Yes Bank was Rs.393 after which it did not revive again to its peak level. The stock price fell almost 96% to Rs.15 on March 6, 2020.
- The % holding of Institutional Investors (FIIs + DIIs) was declining consistently from 57.70% in Dec 2018 to 29.38% in Dec 2019. This means Institutional Investors have been net sellers of Yes Bank stock since last one year.
- Whereas, Retail Investors are buying the stock sold by smart Institutional Investors in an attempt of bottom fishing. % holding of Retail investors increased from 22.48% in Dec 2018 to almost 62.29% in Dec 2019, being the net buyer of Yes Bank from last one year.
- This sharp rise in holding by retail investors was in contrast with the strategy adopted by foreign institutional investors and mutual funds.
- Retail investors are still buying the Yes Bank stocks in an attempt to make up and average out the earlier losses by buying the stock at current lower price levels. Retail Investors’ this move may be inline with the hope of future revival in the stock price of Yes Bank. However, it is not feasible in case of Yes Bank.
Learnings from Yes Bank Crisis – What Retail Investors Should Do?
- Retail investors should not look blindly at stocks that are trading quite lower than their 52-week highs.
- So, a retail investor should never jump into such catching a falling knife stocks. It can be extremely dangerous – Don’t try to catch a falling knife, otherwise you would bleed just like while catching a actual falling knife.
- Value and quality should go hand in hand. Quality is of paramount importance even in case of bottom fishing or value investing of stocks.
- There is definitely an opportunity for bottom fishing, but it is a very selective opportunity and has to be done with great prudence. Fishing in troubled water proves costly for investors just like the case of Yes Bank.
- When we are going to have a slowdown for at least next couple of quarters, it makes more sense to really stick to quality names rather than trying to buy stocks that have corrected sharply. It is because, we do not know how long this slowdown phase will last and how the market is going to deal with volatility.