The following is an extract from our Monthly Newsletter from the Stallion Research Desk.
We at Stallion have always spoken about stocks which don’t fall in a Bear Market or in a sideways Market. These are actually the stocks to be into for the Next Cycle. We believe Falling periods in Markets are the biggest source of Winners for the next Bull Market.
In this study, we tried to look out for companies which hadn’t fallen a lot or were actually flat, when markets were correcting in different Periods. The hypothesis is that our chance of winning has to improve significantly for the next Bull Market, once we know who the winners of the Bear Markets are.
In this study, we tried to compare returns of the Market and Leading stocks in the Bad times as well as the Good Times. And, how better are the probabilities of catching Multibaggers out of the Winners and Losers of the Bear Market.
Our identification starts as soon as the Market Bottoms and how some of the Stocks between the top and bottom of the Market Cycle has performed, which is at “Point A” of this chart. (of course, this market pin-points are with a lot of Hindsight bias)
By the time, the Markets bottoms, which are supposedly down by 20-25%, the leading stock of the next cycle will be high by 35-40%, which is an out performance of 55-65%, which is huge.
As soon as the Market recovers to the older highs, the Leading stocks will be higher by 200-400% from the previous Market Top.
Even, post the Market Recovery, the Leading stocks will broadly add another 200-300%.
The Bull Market will broaden, it will take a lot of Crappy stocks higher, while the Leading stocks will take a pause and Consolidate around the Lifetime highs.
As the broader market froth up, and market hits a jitter, the Leading stocks continue to lead again in the Market.
The Broader idea is do we have a better chance to catch the Winners of the next Bull Market, if we already know which are the winners of the Bear Market.
In our methodology, we have looked at various bear markets, or large bull market corrections which were in excess of 10% and periods exceeding for 3 months. We filter out the stocks which were positive or hadn’t fallen (<10% fall) during the falling market till the Market Bottom was made.
This is an illustration how we have calculated returns for Winning stocks or Losing Stocks –
We analyzed close to 6 periods in last 2 decades of Nifty Indices, where-in these indices delivered significant Negative Returns –
During these periods, we focused on Stocks which fell the Least during the fall and rose the Most in the subsequent Rise.
Winning Stocks –
(The table is pretty easy to understand.)
Let’s start with Column (3), what does 9.3% mean? – So, the sample size is 547 stocks, there were around 50-55 stocks which rose or were flat, during the market fall of Feb 2000-Sept 2001.
Now, look at Column (5). What does 6.4% mean? – So, out of the sample size of 547 stocks, there were close to 30-35 stocks, which gave returns of 100%+ in the subsequent rise period.
And, in last Column (6) what does 68.6% success rate mean? – So, if you had 10 stocks in the Portfolio, 7 stocks would be stocks which would have given you returns of 100%+ in the rise period. )
Conclusion for Winning Stocks –
As per the Winning Stocks table, it’s pretty clear that once you can identify the winners of the Bear Market, the chance of finding the next winners has a very high Probability.
In some of the earlier subset, finding the next Multibaggers from the sub-set of the Winners was as high as 70%.
Not only, there were higher number of winners from this List, in terms of stocks which have delivered more than 500% returns were also higher. Higher probability of Finding Winners as well as scoring big on Returns if one has found them.
Losing Stocks –
Conclusion for Losing Stocks –
Finding the next Multibaggers, from sub-set of Losing stocks has a lower probability than that of the Winning stocks.
The number of stocks on the falling side is always higher than that on the Winning, but the probability of finding the next Multibaggers reduces significantly, thus a large number of stocks to choose from is not a very big advantage.
Despite the higher number of Stocks, the larger winners in terms of % gains came from the Winning Pool of stocks.
The Success Rate of Finding the next Multibaggers is significantly higher from Winning stocks in a Bear Market.Our focus has always been looking out for Companies with High Earnings Growth and Market Leadership, how are they reacting to the Bad news of the Market or to any stock-specific news.
The worst-case scenario valuations is really important for us in the bad times to judge the Downside Risks.
Adding the Armor of stocks not reacting to bad news or in extremely bad markets, are the signs of big re-rating on the cards in the next market cycle.
Disclosure: Stallion Asset is a SEBI Registered PMS and Research Analyst Service. The following views should be used for Educational purposes only.