Data suggests retail investors are sucking up beaten down stocks

This famous quote from investment guru Warren Buffett on stock-picking seems to be driving the participation of retail investors in India’s stock markets. And, going by shareholding disclosures for the March 2023 quarter, many individual investors have come up with their own stock-picking strategy: companies that are either cheap or plain heavyweights.

The recently released data by Capitaline and BSE provides an interesting insight into the behavior of retail investors. And the darlings of these investors: Yes Bank, Tata Power, Tata Motors, Reliance Industries Limited (RIL), Reliance Power and State Bank of India (SBI). Between them, these companies have a total of 26 million retail shareholders.

beaten stock

Yes Bank has the largest number of retail shareholders (4.97 million), followed by two Tata group companies and others. However, Yes Bank stock gave negative 45% compound annual growth rate (CAGR) returns during the financial years 2018-23. Surprisingly, the lender saw a sharp jump in the number of retail shareholders between financial years 2020 and 2023, when its stock took a hit after the Reserve Bank of India granted a 30-day moratorium.

Same is the case with some other stocks as well. For example, the number of retail shareholders in Adani Power stood at 549,000 by FY2021, but is expected to more than double to 1.76 million by FY2023. At Adani Ports, their number is set to increase from 390,000 in FY2021 to 1.07 million in FY2023. IDFC First Bank sees headcount increasing from 1.14 million in FY2021 to 1.65 million in FY2023. The case of telecom company MTNL is even stronger. While its market share in the telecom sector decreased, the number of shareholders increased from 153,459 in FY2021 to 180,512 in FY2023. Jaypee Power, another beaten stock, retail investor count rises from 360,000 in FY2021 to 1.44 million in FY2023

All these figures point to the tremendous appetite of retail investors for beaten stocks – scrips that have seen sharp corrections and the stock price has fallen to double or even single digits. For example, Yes Bank stock is currently trading at 16 per share, falling from lifetime highs 404 in FY2019.

So, what do retail investors invest in these stocks. “Retail investors tend to look at low priced stocks with the expectation of seeing a turnaround after some time. They often miscalculate that stocks are likely to decline after a steep fall,” says G. Chokkalingam, founder, Equinomics Research & Advisory. There’s just some other place.”

“Also, since the prices are cheap, they can buy a large number of shares,” he says. For example, a person who wants to invest 1 lakh can buy 1,000 shares of a company 100 per piece but can buy double this number if the price is 50 a share and then expect to make a huge profit if the prices go up.

business group

It’s not just beaten down stocks that are popular among retail investors. Heavyweights, or well-known business conglomerates, also see large retail shareholder participation. A case in point: RIL, SBI and Tata Power are among those that have the largest number of such shareholders. RIL has always been a favorite of retail shareholders as well. The stock has given a CAGR return of 20.9% over FY18-FY23.

While SBI has a strong brand recall value being one of the oldest banks in India with the largest branch network in the country, Tata Motors and Tata Power have been hit hard by the government’s recent push for electric vehicles (EVs). The expansion of charging stations for such vehicles and the growing interest in the EV sector by the wider market.

All these three stocks have given 11.6%, 1.9% and 15% CAGR returns during FY18-FY23 respectively. Only RIL and Tata Power have managed to outperform the S&P BSE Sensex, which delivered a CAGR of 12% during the same period.

In addition to the popular heavyweights, individual shareholders prefer beaten down shares of companies that are part of any conglomerate. Deepak Jasani, head of retail research at HDFC Securities, says, “Retail investors tend to buy beaten shares of companies run by business groups in the hope that adequate measures will be taken to unlock value. Activities have increased in terms of numbers. Expectations of positive corporate action also act as a magnet for higher participation from retail investors.”

For example, the debt-ridden Anil Ambani group’s Reliance Power has 3.5 million retail shareholders. The stock gave a CAGR return of -26.8% over FY18-FY23.

While the brand value of Reliance and Tata have made them popular among investors, the cheap prices of Yes Bank and Reliance Power have piqued the interest of retail investors.

Shrikant Chauhan, head of equity research, Kotak Securities, says, “It is observed that whenever a large-cap company is hit by a specific news alert (especially where it pertains to corporate governance issues), FIIs and DIIs try to exit 100% and liquidate it. Holding in the open market. But retailers run in with the hope of exiting with quick profits. However, most of the time they get caught on the wrong move.” FII is short for Foreign Institutional Investors and DII is short for Domestic Institutional Investors.

what investors say

Khushal Sethia, a 22-year-old resident of Hyderabad, says he invested in Reliance Power in 2018 on the suggestion of his friends. He claims to have made 50% profit on the stock and freed up his capital while the rest is still invested in it.

Pune-based Hiten Doshi, 24, says he invested in RIL because of its strong brand and the M&A (mergers and acquisitions) deals the company was doing. He didn’t know much about the fundamentals of the stock, but he was betting on Mukesh Ambani, the chairman and managing director of RIL, and the success story of the firm.

Rhythm Sharma, 23, says he has invested in SBI, Tata Motors and Yes Bank. SBI is a trusted brand and the stock was available cheaply. As for Tata Motors, the Pune resident says, the firm was the first to foray into the EV space and ace investor Rakesh Jhunjhunwala also invested in it. Sharma claims that he invested a small amount in Yes Bank because of the cheap share price.

what to watch

Investors should look at the returns generated by these stocks and compare them with the market benchmark S&P BSE Sensex. They can lose their investment capital if the beaten down stock continues to touch new lows even after a correction. Betting on a company’s turnaround is like timing the market. And it can be very risky.

“The absolute price of a stock does not make it cheap. It is the valuation that qualifies a stock as cheap or not. Interestingly, more than two-thirds of the stocks that eventually get suspended from stock exchanges were trading absolutely cheap,” says Chokkalingam.

Hence, before investing in these stocks one must understand the risks and returns offered by these stocks in the long term. Many of these stocks are popular because of their cheap prices. Investing directly in equity is not easy. If the expected turnaround never happens, entering stocks solely because of their low prices, rather than focusing on their fundamentals, can backfire.