52 Week Highs & Lows – How to Profit from Fluctuations in Sensex & Nifty Stocks

Fluctuations in share prices are as old as the concept of shares and stock markets themselves. Infact, had it not been for the regular fluctuations, stock market would have been a very boring place. It would be like a bond or a FD. And who would like that. 😉

As a long term investor, few things excite me more than the large fluctuations in share prices of individual companies. And I am not talking about small companies (having few crores market cap) here. I am referring to large caps, i.e. huge and well established companies of India.

Being a risk-averse investor, I have a liking for large businesses. Investing in well established and (supposedly) well-run businesses helps me sleep well at night. 😉 These businesses have witnessed and survived multiple bull and bear markets. So chances of them surviving again are pretty good.
And if we are patient enough, markets eventually do offer temporary mispricing in large caps shares.
But most investors believe that there are fewer opportunities to create money in large caps. I do not subscribe to this view and have already written about why it makes sense to consider large caps when others are looking elsewhere (This article was quotedby the CEO of a leading MF house in their monthly publication).
52-Week High Vs 52-Week Low
Now I did an interesting study comparing the 52-week lows with 52-week highs of various companies constituting Sensex and Nifty 50. Take a look at the analysis in tables below (share prices as of 30th June 2016). The column titled ‘% Change’ measures the difference between the 52-week high and 52-week low in percentage terms:

Sensex 52 week high low

As you can see, there is a huge difference between the two numbers for most companies. Infact, the average difference between the 52-week highs and lows is more than 50%.

Doesn’t that smell like opportunity to buy low and sell high, even in short term?

Now take a look at the Nifty 50 companies:

Nifty 52 week high low
The story remains the same. Here too, the 52W-high is almost 150% of the 52W-low.

Now these companies are well-established and safe businesses (ofcourse if bought at the right price). But think of it – does it really make sense that a company like (say) TCS, is worth Rs 4.2 lac crore today and worth Rs 5.5 lac crores after few months?

No – I don’t think so.

For most of these large companies, there isn’t much that changes at actual business level in the course of few months. Its only the perception of market participants that changes and moves the prices.

The reason for such wide difference in perception of actual value (which drives market price) can be many. In a post about fluctuations in market price of large companies, John Huber mentions about two sources of market’s inefficiencies: 1) Disgust and 2) Neglect.

Now large cap companies are generally not mispriced due to neglect, given the analyst coverage and popularity they have.

More often, mispricing is because of disgust or pessimism. This temporary disgust can be due to bad results, negative news, temporary legal problems, etc. Large caps (or even the stocks in other categories) can get beaten down even when the general market environment is pessimistic. In bear markets, shares of companies with no significant problems at all, are beaten down because of general economic pessimism. Its like all boats (good and bad) come down when the water levels reduce in river.

Mr. Market (and not Mrs. Market)

I am sure you have heard of the concept of Mr. Market (created by Benjamin Graham). This concept is quite relevant here and hence, I mention it:

Every day, Mr. Market will come up to you and quote a price for a stock (or stocks).

When he is optimistic about the future of the business, he will quote a high price to buy or sell. On days when he is not feeling great about the future, he would quote a very low price.

But luckily for you, he does not force you take a decision. You can choose to do nothing about Mr. Market’s quotes and he still won’t mind (maybe that’s the reason Graham created Mr. Market and not Mrs. Market). 😉

And if you are sensible, you would sell to him at a high price AND buy from him when his price is lower than what you consider low-enough.

And this is the beauty of this game. You can always wait. You can wait till the stock you want to buy is mispriced (on lower side).

Mr. Market’s continuous irrationality and urge to give a quote to you everyday creates the opportunity, which you should wait for.

And as Charlie Munger points out: “For a security to be mispriced, someone else must be a damn fool.”

So all you need to do is to wait to find a damn fool on the other side of the trade you want to make. If not a damn fool, even a fool would do. 🙂

A Real Life Example of Mispricing

A friend of mine is into poultry farming. Now without sharing the real numbers, lets assume that few years back his business was churning out annual profits of Rs 50 lacs.

One day, things got bad and some bird-disease spread in his farm. He had to take the drastic step of eliminating all birds as is the norm in poultry business. The business was in distress. At that time, he received an offer from a competitor to purchase his business (including physical assets) for about Rs 5 crore.

He declined the offer as it was too low. Also because poultry was one of the many businesses he owned, he could chose to wait for things to get better as he was not going to go bankrupt due to the poultry fiasco.

Eventually, he revived the business in an year or so and got another offer for about Rs 12 crore. He did not sell even then. I don’t know what price he would have sold at. Maybe Rs 50 crore (Sell high. Remember?). I don’t know.

But what I am trying to say here is that inspite of the business generating profits as earlier, there were buyers willing to give more than twice the original offer. Ofcourse, the original offer was made at a time of distress. But that was a temporary distress. Different people were valuing the same business at different times differently.

The same happens in stock markets.

Temporary problems (leading to disgust) or general pessimism (bear markets) causes share prices to go down. This doesn’t mean that that is the end of the road for the businesses. Businesses recover. And this what an investor should remember.

Market prices will continue to fluctuate more than actual intrinsic values. So as a discerning investor, if you are willing to look further than other investors and are also ready to accept short term losses and volatility, then you can indeed benefit from these opportunities.

This is what Warren Buffett had to say about how we as investors can benefit from these mispricings:

If you look at the typical stock on the New York Stock Exchange, its high will be, perhaps, for the last 12 months will be 150 percent of its low so they’re bobbing all over the place. All you have to do is sit there and wait until something is really attractive that you understand.

And you can forget about everything else. That is a wonderful game to play in. There’s almost nothing where the game is stacked in your favor like the stock market.

What happens is people start listening to everybody talk on television or whatever it may be or read the paper, and they take what is a fundamental advantage and turn it into a disadvantage. There’s no easier game than stocks. You have to be sure you don’t play it too often.

People tell me that small and mid-caps offer far more opportunities than large caps. That is true. And many times, these opportunities offer potentially higher returns than what mispriced large caps might offer.

But small cap investing comes with higher degree of risks and as I have already mentioned, I have a bias for looking out for mispricing in large cap stocks.

So if like me, you are also interested in large cap stocks, then do keep track of index (Sensex, Nifty, etc.) stocks and their 52 week highs and lows. I do it using simple Google sheet (screenshot below):

Tracking 52 week high low

I am sure that you will soon find large cap stocks getting mispriced. 🙂


Investing in Large-Cap Stocks. Don’t Ignore It.

For a moment, let’s keep aside the discussion of investing in large-cap stocks and dedicate next few sentences to the over-glamorized concept of ‘Thinking outside the box’. As per generally agreed definition, thinking outside the box is a metaphor that means to think differently, unconventionally, or from a new perspective. This phrase often refers to novel or creative thinking.

Now you will agree with me that even referring to this phrase makes one sound smart. Even though it’s not at all easy and infact, a grossly misunderstood concept.
Now lets come back to what this website is about – Investing + Common Sense.

Investing India Large Caps

It is a commonly held notion that one needs to do something out of the ordinary, to find multibagger stocks. For example being able to correctly predict a sector’s rise in future, correctly predicting a company’s turn around, correctly predicting Fed rate cuts and how it impacts investors, etc.
To an extent, it’s true. When investing, it does auger well for an investor if he can look outside the box and correctly identify change in trends, businesses, demands, etc.
But when markets continue to do well, market participants (lets ignore whether they are investors or traders) need to increase their efforts to find their next investment thesis. Why is an increase in efforts required? It is because due to rise in markets, good investment opportunities become hard to find.
Now by definition, good investment ideas are rare. So one essentially needs to look in unexplored pockets of stock markets to find good investment worthy stocks. This works well for really good analysts and investors.
But when this trend of finding multibaggers catches the fancy of common investors (who might get attracted to terms like value investing, moat investing, special situations investing, etc.), I feel that the possibility of stocks of well established, large-cap companies getting ignored and falling off the radar, increases.
What I am saying is that when everyone is looking outside the box, it might be a good idea to turn around and look into the box again. Its because there is a good chance that there might be a few good, investment worthy stocks, lying there in plain sight.
To be more specific, it’s possible that when you are looking for the next multibagger among small-caps and other exotic stocks (outside the box), some seriously undervalued stocks might be available in the large-cap space (inside the box).
I was reading an article by John Huber of Saber Capital Management (Base Hit Investing), where he talks about why stocks get mispriced in general. Here is what he had to say, especially about large-caps:
Large caps stocks that get mispriced are almost always due to disgust. These stocks are large companies that are widely followed by investors and analysts. There is very little information that is not widely known by all market participants. However, sometimes these large companies run into a temporary problem and investors sell the stock because the outlook for the next quarter or the next year is poor. Investors can take advantage of this situation by a) accurately analyzing the situation and determining that the nature of the problem is in fact temporary and fixable, and b) be willing to hold the stock for 2 or 3 years—a timeframe that most individual and institutional investors are not willing to participate in.
Some investors refer to this concept as “time arbitrage”. It just means that you’re willing to look out further than most investors and willing to deal with near term volatility and negative (but temporary) short-term business results.
In addition to a company specific “disgust”, these large caps can also get beaten down when the general market environment is pessimistic. In bear markets, companies with no problems at all often see their stock prices get beaten down because of macroeconomic worries or general market pessimism.
So although many value investors look at small caps because they feel this is where they can gain an informational advantage, I think taking advantage of this “disgust” factor is just as effective and is an important arrow to have in the quiver.

These are some really wise words for common investors, looking to build their own direct stock portfolio, in addition to mutual funds portfolio (highly recommended thing to do).
What John is trying to say is that as a common investor, it’s really tough to find the next set of multibaggers (especially in small-cap universe). Common investors by definition do not have the time or the skill to correctly analyse real businesses behind stocks. And honestly speaking, the best they end up doing is to get a tip from here and there, and invest their money, hoping to be right.
Sometimes, it works. But most of the times, it doesn’t.
It can work beautifully in Bull markets as a rising tide lifts all boats. But it can cause big losses when Bulls give way to Bears.
Think about it. When almost everyone is ignoring large cap stocks and looking in the mid-cap and small-cap universe, isn’t it possible that some good, solid and established businesses might be available at throwaway prices? I think, its possible.

A common investor’s best bet when dealing with stock markets, is to use their Common Sense.

So read the paragraphs by John (italicized above) again. Don’t ignore large-cap stocks just because everyone else is saying that they don’t move much. Apart from focusing on upsides, its also very important to protect the downsides when investing. And large caps can help you do that. They generally* don’t fall as sharply as most small-caps.
* There is no guarantee that large-caps won’t fall a lot. It did happen in 2009-2009. It’s just that it doesn’t happen with large-caps as frequently as it happens with small- and mid-caps.

Top 23 Large Cap Indian Stocks

We are students of the Capital Protection School of Thought*, which is built on the thought that “Return OF Capital is more important than Return ON Capital”.

* There is no such school in real life 🙂

You might feel that if our prime motive is capital protection, then why are we entering stock markets? You are right. Stock markets are risky places where chances of losses increase in direct proportion to chances of achieving higher returns. There are n number of other safe investment instruments like bonds, PPF, NSC, Bank Deposits, Recurring Deposits, gold, etc. But we must be aware of their limitations too. Historically, these asset classes have failed to beat equities in the long run. So though we hate losing money and want to stick with rock solid and safe instruments, the fact remains that we cant ignore equities.

So, if you are in sync with what we just said OR if you consider yourself to be an average investor, incapable of giving a lot of time to stock analysis, it makes sense to only go for proven businesses in stock markets. These are companies which have been there and done that. They are businesses which are capable of weathering economic, political, sectoral storms. These are large businesses. These are large cap companies.

We always had an attraction for large cap stocks available at cheap prices. So when Morgan Stanley came out with a list of large Indian businesses with market cap greater than $10 Billion, we couldn’t help getting attracted towards it. 🙂

The guys at Morgan Stanley have taken these 23 ten billion dollar companies and ranked them on following parameters –

  • Strong 5 year trailing ROE and earnings growth
  • High forward change in ROE and earnings
  • Depth & breadth of consensus earnings revision

We don’t know the exact details of the rating/ranking mechanism, so we can’t comment on the same. This list is a work of Morgan Stanley. You should not take this post as an endorsement by Stable Investor about these stocks or Morgan Stanley’s approach. Do have a look at this list. And if you do invest your money in any of these stocks, that would be at your own risk. 🙂

India’s Top 23 Large Cap Stocks

Disclosure: We do hold some of these stocks in our personal portfolios.