WHAT TO DO WITH CROMPTON STOCK NOW?

WHAT TO DO WITH CROMPTON STOCK NOW?

I was truly overwhelmed by the response yesterday to my article on Crompton and since a lot of people have asked me what to do with the stock now? I just thought it was worthwhile to come out with a follow up piece.

First up, as I expected and wrote in my article yesterday, the brokerage downgrades have come and just take a look at these downgrades.

- Macquarie has cut its target from Rs 347 to Rs 158 (54% cut)

- HSBC has cut its target from Rs 330 to Rs 205 (38% cut)

- JPMorgan has cut its target to Rs 135 from Rs 300 (55% cut)

- Consensus target of Rs 166 from Rs 322 (48% cut)

- Consensus EPS target has been cut from Rs 17 to Rs 9

Too bad, they have come far too late for those invested in the stock.

Anyways, let’s shift focus to retail investors and what should they do with the stock now? Keep in mind Crompton Greaves is an F&O stock and over last 2 days you have seen almost a trebling of Open positions in futures segment of the stock and with short traders sitting on so much money, there is bound to be a short-term relief.

This relief rally may well take Crompton to above Rs 200 mark in the near-term but honestly that’s an opportunity for those still stuck in the stock and especially those who bought the first fall and bought around Rs 210-215 zone. And that’s because as I wrote yesterday, the over-ownership should now correct and some of the large funds will dump the stock, so the supply pressure on the stock is likely to be relentless.

Now if you are an investor with a 10-year portfolio view, it should not matter to you whether you buy now, or you buy 20% cheaper, because you want to buy it if you believe it will be a multi bagger over next 10 years. But what should you do if you want to buy with a 2-3 year horizon?

Over the last 8 years, I have studied some of these blue-chip companies going through fundamentally weak period and believe me; the extent to which some of these stocks can fall can really amaze you, most recently SBI falling nearly 40%, sometime back L&T falling nearly 40% and these are among the bluest of blue-chips one can imagine. So if you are investing from 2-3 year horizon, absolutely stay away from this stock. Wait for it to find its feet, let it come out with 2 quarters of stable earnings and then take a plunge. If you miss the first 20% of rally, never mind, there is a risk of losing 50% trying to catch this first 20%.

Disclaimer: The author of this article does not invest/trade in stock markets including derivatives. His only exposure to stock markets is via the stock options of TV18 and Network18 given to him by his company as part of his compensation